linking corporate strategy to operations : a critical
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Electronic Theses and Dissertations
12-2013
Linking corporate strategy to operations : a criticalreview of Prof. Kaplan’s theories and thedevelopment of a best-practice approach.Alexander BognerUniversity of Louisville
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Recommended CitationBogner, Alexander, "Linking corporate strategy to operations : a critical review of Prof. Kaplan’s theories and the development of abest-practice approach." (2013). Electronic Theses and Dissertations. Paper 2283.https://doi.org/10.18297/etd/2283
LINKING CORPORATE STRATEGY TO
OPERATIONS
A CRITICAL REVIEW OF PROF. KAPLAN’S THEORIES
AND THE DEVELOPMENT OF A BEST-PRACTICE APPROACH
Dissertation
Submitted to the Faculty of the
J. B. School of Engineering of the University of Louisville
in Partial Fulfillment of the Requirements for the
Doctor of Philosophy
Department of Industrial Engineering
University of Louisville
Louisville, Kentucky, USA
December 2013
© Copyright 2013 by Alexander Bogner
All rights Reserved
ii
LINKING CORPORATE STRATEGY TO
OPERATIONS
A CRITICAL REVIEW OF PROF. KAPLAN’S THEORIES
AND THE DEVELOPMENT OF A BEST-PRACTICE APPROACH
by
Alexander Bogner
Diplom Kaufmann, HFH Hamburg, 2005
Master of Science Industrial Engineering, University of Louisville, 2010
A Dissertation Approved on
December 02, 2013
by the following Thesis or Dissertation Committee:
__________________________________
Dr. William E. Biles, Dissertation Director
__________________________________
Dr. Gerald W. Evans
__________________________________
Dr. Lihui Bai
___________________________________
Dr. Thomas Riedel
iii
DEDICATION
This dissertation is dedicated to my wife Mrs. Anja Bogner.
iv
ACKNOWLEDGEMENTS
I would like to thank my major professor, Dr. William Biles, for his guidance
and patience. I would also like to thank the other committee members for their
comments and assistance over the past years.
I would also like to express my thanks to my wife, Anja, for her understanding
and patience during those times when there was no light at the end of anything. She
encouraged me and made me stick with it.
Also, many thanks to my company partner Tom Meixner and to Dirk Mailänder
for the support and the helping hand over the last three years.
v
ABSTRACT
LINKING CORPORATE STRATEGY TO OPERATIONS
Alexander Bogner
December 02, 2013
The rising speed of change in global frameworks drives international companies
into a non-stop changing organization with the need of generating optimal revenues
under changing conditions. Regarding to the need to be a flexible and competitive
organization the value of a vision and a perfectly streamed strategy to this vision
becomes a main success factor for global business.
The trend for the need of development of a clear and constant strategy is equally
rising with the trend of globalization and intercontinental business companies and
therefor the business of strategy consulting rises constantly from the late 1990.
Most of the strategy consulting companies concentrate their business on
consulting companies with strategy and vision ideas and concepts with the focus on the
innovation of new products and services to conquer new markets or to optimize their
organizations and processes. The main focus is to provide a strategy concept with
respect to cross knowledge of other industries and a set of standardized consulting
methods out of their own experience or provided by research departments connected to
business universities and institutes.
The topic of how this strategy concept is linked to the operation business of the
company is nearly never presented by these strategy consulting companies. So the result
vi
of the consulting projects is a well-defined and workedout strategy concept, proven by
the leader board but without any concept, set of methods or any approach how to realize
the ideas of the concept in the “real world”.
Prof. Kaplan realized this lack in the business world and provided several
research papers and extended books to support companies with solutions solving this
problem.
Especially his latest work “The execution premium” concentrates his research on the
topic how to link worked-out strategies to operations for competitive advantages.
The first aim of the dissertation is to review and analyze the theories from Prof.
Kaplan, focusing on “the execution premium”.
As the second aim the dissertation will document the execution of his provided
concepts and methods in a “real-life” experiment followed by a gap analysis of the
experiment with respect to Kaplan´s theories. Finally the heart of the dissertation will
be the development of a best-practice approach to fill up selected gaps and provide a
general and integrated approach including a seamless-linked method tool kit for the
realization of strategies in companies focusing on the field of executing the strategic
initiatives
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TABLE OF CONTENTS
DEDICATION III
ACKNOWLEDGEMENTS IV
ABSTRACT V
TABLE OF CONTENTS VII
LIST OF TABLES XI
LIST OF FIGURES XIII
1 INTRODUCTION 1
CHALLENGE TO LINK STRATEGY TO OPERATIONS 1
PROBLEM STATEMENT 2
RESEARCH CONTRIBUTION 3
SCOPE OF THE DISSERTATION 3
2 LITERATURE REVIEW – KAPLAN´S THEORIES 4
THE EXECUTION PREMIUM 4
2.1.1 STEP 1: DEVELOPMENT OF THE STRATEGY 6
2.1.2 STEP 2: PLAN THE STRATEGY 13
2.1.3 STEP 3: ALIGN THE ORGANIZATION 23
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2.1.4 STEP 4: PLAN OPERATIONS 29
2.1.5 STEP 5: MONITOR AND LEARN 46
2.1.6 STEP 6: TEST AND ADAPT 50
2.1.7 THE OFFICE OF STRATEGY MANAGEMENT 54
BALANCED SCORE CARD: TRANSLATING STRATEGY INTO ACTION 60
2.2.1 PERSPECTIVE ONE: “FINANCIAL PERSPECTIVE” 60
2.2.2 PERSPECTIVE TWO: “CUSTOMER PERSPECTIVE” 61
2.2.3 PERSPECTIVE THREE: “INTERNAL BUSINESS-PROCESS PERSPECTIVE” 62
2.2.4 PERSPECTIVE FOUR: “LEARNING AND GROWTH PERSPECTIVE” 62
2.2.5 “FEEDBACK AND THE STRATEGIC LEARNING PROCESS” 63
THE STRATEGY-FOCUSED ORGANIZATION 63
2.3.1 PRINCIPLE 1: “TRANSLATE THE STRATEGY TO OPERATIONAL TERMS” 64
2.3.2 PRINCIPLE 2: “ALIGN THE ORGANIZATION TO THE STRATEGY” 65
2.3.3 PRINCIPLE 3: “MAKE STRATEGY EVERYONE’S EVERYDAY JOB” 65
2.3.4 PRINCIPLE 4: “MAKE STRATEGY A CONTINUAL PROCESS” 66
2.3.5 PRINCIPLE 5: “MOBILIZE CHANGE THROUGH EXECUTIVE LEADERSHIP” 66
3 EXPERIMENT 68
ENVIRONMENT FOR THE EXPERIMENT 68
STEP 1 AND 2: DEVELOP AND PLAN THE STRATEGY 69
STEP 3: ALIGN THE ORGANIZATION 69
STEP 4-6: PLAN OPERATIONS, EXECUTION, MONITOR AND LEARN, TEST AND
ADAPT 70
CONCLUSION 71
4 GAP-ANALYSIS: KAPLAN´S THEORY AND PRAXIS EXPERIMENT 72
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STEP 1 AND 2 - DEVELOPMENT AND PLAN THE STRATEGY 72
STEP 3 – ALIGN THE ORGANIZATION 75
STEP 4-6 - PLAN OPERATIONS, EXECUTION, MONITOR AND LEARN, TEST AND
ADAPT 76
CONCLUSION 77
5 APPROACH FOR BEST-PRACTICE SOLUTION: ISOL-M 79
GENERAL APPROACH - PTO 79
ISOL-M – THE MODEL 80
ORGANIZATIONAL REQUIREMENTS FOR ISOL-M 82
5.3.1 STRATEGIC MANAGEMENT ORGANIZATION (SMORG) 83
5.3.2 INITIATIVE AND PROGRAM ORGANIZATION (IPORG) 83
5.3.3 PROJECT ORGANIZATION (PORG) 84
5.3.4 STRATEGY MANAGEMENT BOARD ORGANIZATION (SMBORG) 84
5.3.5 PROCESS AND RACI 85
PHASE 1: STRATEGY DEVELOPMENT 86
5.4.1 COMMUNICATION CONCEPT 87
5.4.2 SELECTION OF STRATEGY ANALYSIS METHODS 87
5.4.3 STRATEGIC FORMULATION 90
5.4.4 ORGANIZATIONAL RESPONSIBILITY 91
PHASE 2: STRATEGY PLANNING 92
5.5.1 THE WAY TO STRATEGIC INITIATIVES AND PROGRAMS 92
5.5.2 INTEGRATED STRATEX TOOL 95
5.5.3 ORGANIZATIONAL RESPONSIBILITY 97
PHASE 3: CAPACITY SETUP 97
PHASE 4: EXECUTION 100
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5.7.1 STEP 1: PROJECT IDEA EVALUATION 100
5.7.2 STEP 2: PROJECT PRESENTATION AND DECISION 105
5.7.3 STEP 3: PROJECT REQUIREMENTS 116
5.7.4 STEP 4: PROJECT APPROVAL 117
5.7.5 STEP 5: PROJECT EXECUTION 117
6 CONCLUSION 135
REFERENCES 141
APPENDIX 144
CURRICULUM VITA 146
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LIST OF TABLES
Table 1: Align the organization process ...................................................................... 24
Table 2: Main process in planning operations ............................................................. 30
Table 3: Example of TDABC - step 1 ......................................................................... 42
Table 4: Example of TDABC - step 2 ......................................................................... 42
Table 5: Example of TDABC - step 3 ......................................................................... 44
Table 6: Example of TDABC - step 4 ......................................................................... 45
Table 7: Overview of Monitor and Learn Meetings .................................................... 47
Table 8: Overview of Reviews, Testing and Adaption ................................................ 54
Table 9: RACI .............................................................................................................. 85
Table 10: PESTEL Tool............................................................................................... 88
Table 11: SWOT Tool ................................................................................................. 89
Table 12: BSC Tool ..................................................................................................... 93
Table 13: Action Planning Tool ................................................................................... 94
Table 14: Initiative and Program Planning Tool .......................................................... 95
Table 15: STRATEX Tool ........................................................................................... 96
Table 16: Capacity Tool............................................................................................... 99
Table 17: SMB Tool Evaluation Start ....................................................................... 101
Table 18: SMB Tool Project Decision - Project Benefit Calculation ........................ 106
Table 19: SMB Tool Project Decision - Project Contribution Calculation ............... 108
Table 20: SMB Tool Project Decision - Project Ranking - Calculation .................... 109
Table 21: SMB Tool Project Decision - Project Time Calculation ........................... 110
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Table 22: SMB Tool Project Decision - Project Resource Utilization Calculation ... 111
Table 23: SMB Tool Project Decision - Project Activity Index per Month .............. 112
Table 24: SMB Tool Project Decision - Person Activity Index ............................... 113
Table 25: SMB Tool Control ..................................................................................... 125
Table 26: Project Build Tracker ................................................................................. 126
Table 27: Test Levels ................................................................................................. 127
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LIST OF FIGURES
Figure 1: Wall Street Journal – survey Top Five Management Concerns ..................... 1
Figure 2: The management system from Kaplan ........................................................... 4
Figure 3: enhanced vision with four prospective framework of strategy maps ............. 8
Figure 4: strategic map for strategy selection .............................................................. 11
Figure 5: Strategic Formulation Guidelines ................................................................. 12
Figure 6: Strategy map ................................................................................................. 13
Figure 7: BSC method for definition of measures and targets..................................... 15
Figure 8: Example at Customer Bank: Value GAP and target setting ......................... 16
Figure 9: Cause-and-Effect-Logic ............................................................................... 17
Figure 10: launching strategy into motion ................................................................... 18
Figure 11: Strategic Initiative Portfolio ....................................................................... 19
Figure 12: General View of Budgeting with STRATEX ............................................. 21
Figure 13: Detailed View of Budgeting with STRATEX ............................................ 22
Figure 14: BSC for aligning the organization .............................................................. 25
Figure 15: vertical and horizontal alignment ............................................................... 26
Figure 16: Link between process improvement and BSC strategic priorities ............. 31
Figure 17: linking process management to BSC strategic processes ........................... 33
Figure 18: BSC linked with CSF and metrics .............................................................. 34
Figure 19: Link between Strategy Map, cause-and-effect model and dashboards ...... 35
Figure 20: Integrated suite for targeted management control processes ...................... 36
Figure 21: structure for a strategy review meeting ...................................................... 49
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Figure 22: overview of tasks in the management system ............................................ 55
Figure 23: Roles of the OSM ....................................................................................... 56
Figure 24: Sequence of strategy execution .................................................................. 57
Figure 25: Five principles of strategy-focused organization ....................................... 64
Figure 26: ISOL-M model landscape .......................................................................... 81
Figure 27: Communication Concept Tool ................................................................... 87
Figure 28: Decision Matrix Tool ................................................................................. 90
Figure 29: strategy formulation tool ............................................................................ 91
Figure 30: strategy map tool ........................................................................................ 92
Figure 31: Execution Overview ................................................................................. 100
Figure 32: SMB Tool - project idea evaluation ......................................................... 102
Figure 33: Process Project Idea evaluation ................................................................ 104
Figure 34: SMB Tool Project Decision - Project Benefit Graph ............................... 107
Figure 35: SMB Tool Project Decision - Project Ranking – Graph .......................... 109
Figure 36: SMB Tool Project Decision - Project Time Graph .................................. 110
Figure 37: SMB Tool Project Decision - Project Resource Utilization Calculation . 111
Figure 38: Project decision - decision process ........................................................... 114
Figure 39: project requirements ................................................................................. 116
Figure 40: Project Setup............................................................................................. 118
Figure 41: Demand evaluation and approval ............................................................. 120
Figure 42: example generic project plan .................................................................... 122
Figure 43: status report .............................................................................................. 123
Figure 44: Test Phases ............................................................................................... 128
Figure 45: Test Roles and Responsibilities ................................................................ 129
Figure 46: Examples of test reporting ........................................................................ 130
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Figure 47: rollout process .......................................................................................... 132
Figure 48: ISOL-M .................................................................................................... 135
1
1 INTRODUCTION
Challenge to link strategy to operations
Developing sustainable and flexible strategies is a key factor for the company
success in global markets. For that reason many of the top companies set up a strategy
team with their own top management and external consulting companies like Boston
Consulting, McKinsey or Roland Berger strategy consultants.
A survey from the Wall Street Journal (Tuna, 2008) shows that over 50% of the
CEO´s have the main concern that these strategies are not or badly realized on an
operational organization level.
Figure 1: Wall Street Journal – survey Top Five Management Concerns
Prof. Kaplan and Dr. Norton from Harvard University provide research papers
and books about the problems between corporate strategy planning and the strategy
realization in the company.
2
Especially the book: “the execution premium: linking strategy to operations for
competitive advantage” provides a 6-step method solving the problems and shows that
the first approach from Prof. Kaplan only implementing a balanced-score-card stand-
alone without linking this method to other methods of operations does not solve the
problem.
Problem Statement
“Strategy without tactics is the slowest route to victory. Tactics without strategy
is the noise before defeat.” (Anonymous, 544 BC)
The management of strategy and the management of operational business differ
widely, but both are vital and need to be linked and integrated into a complete set of
management activities. (Porter, 1996)
The main problems in this area can be identified and stated into three main topics:
1. Strategy plan is made by external consulting companies without internal view
and problems of the company, only and not even that in every case, considering
the top management view
2. Management Boards have not integrated the middle management layer of an
organization, which should realize the strategy
3. A bunch of strategy-realization methods are stand-alone implemented in the
organization – but without any inter-method-logic and interfaces
Even in the solutions provided by Prof. Kaplan the interaction und interfaces
between these methods are barely elaborated and full of essential gaps for a practical
application.
3
This circumstances show the need of a critical review of Kaplan´s theories and
the development of a generic and integrated-strategy-to-operations-linking-model
(ISOL-M) with the focus of seamless integration of existing strategy and operation
methods.
Research Contribution
The dissertation is supposed to represent a detailed view on the research results
of Prof. Kaplan´s work with the focus on his latest work “the execution premium” and
will provide a best-practice approach for an ISOL-M.
Scope of the dissertation
The dissertation is structured into four main parts.
Part one is an extended literature review of the main research papers and books
of Prof. Kaplan with the focus on his latest work “the execution premium” but also
considering his two other milestones in business literature “Balanced Score Card” and
“The strategy focused organization”.
The second part will provide an experiment for realizing the concepts and
methods of Kaplan´s “execution premium” in an international company.
The third part contributes a gap-analysis with showing the main lacks and gaps
in the theories of Kaplan.
The main and fourth part of the dissertation provides an approach for a best-
practice ISOL-M.
4
2 LITERATURE REVIEW – KAPLAN´S THEORIES
The Execution premium
Figure 2: The management system from Kaplan
5
Kaplan provides in his “The execution premium” (Kaplan & Norton, The Execution
Premium, 2008) a management system for integrating strategy planning and operational
execution. This system has six major steps as shown in the above figure.
Stage 1 – Managers develop the strategy using the strategy tools
Stage 2 – The organization plans the strategy using tools such as strategy maps and
Balanced Scorecards.
Stage 3 – align the organization with the strategy by cascading linked strategy maps
and Balanced Scorecards to all organizational units.
Stage 4 – plan operations using tools such as quality and process management,
reengineering, process dashboards, rolling forecasts, activity-based costing, resource
capacity planning, and dynamic budgeting.
Stage 5 – As the strategy and operational plans are executed, the enterprise monitors
and learns about problems, barriers, and challenges. This process integrates
information about operations and strategy in a carefully designed structure of
management review meetings.
Stage 6 – Managers use internal operational data and new external environmental and
competitive data to test and adapt the strategy, launching another loop around the
integrated strategy planning and operational execution system. (Kaplan & Norton, The
Execution Premium, 2008)
6
“The execution premium” has the effort to provide a blueprint for management
of strategy in the complete lifecycle of the strategy and the linking to operations. But
the authors stated that there is one component they are not able to provide: a visionary
and effective leadership.
Kaplan stated the role for leadership very highly at the beginning of his book.
The only common element all these diverse successful strategy implements have in
common is exceptional and visionary leadership. He declares that leadership is so
important to the strategy management system in every single step of the system that he
calls it necessary and sufficient. He continues that in every instance, the CEO of the
organizational unit implementing the new strategy management system has to lead the
process to develop the strategy and oversee its implementation. No organization
reporting success with the strategy management system had an unengaged or passive
leader. (Kaplan & Norton, The Execution Premium, 2008)
2.1.1 Step 1: Development of the strategy
As shown in figure 2 strategy management is a closed-loop process, with each
part of the system influencing every other part. (Kaplan & Norton, The Execution
Premium, 2008)
The first step of the system is the development of the strategy. This includes
mainly the three following major processes
a) Definition of Mission, Values and vision
b) Strategic analysis
c) Strategic formulation
7
2.1.1.1 Definition of mission, values and vision
Before formulating a strategy, managers need to agree on the company´s
purpose (mission), the internal compass that will guide its actions (values), and its
aspiration for future (vision). (Kaplan & Norton, The Execution Premium, 2008)
In this step, the mission in form of a mission statement (defining why the
organization exists), the values in form of a values statement or core values and the
vision in form of a vision statement (long-term goals of the organization) need to be
formulated.
The outputs of this first process in developing the strategy are three main results:
the value gap, the strategic change agenda and the enhanced vision.
The value gap
The value gap compares the actual formulation of values to the future values
formulated in the value statement.
The Strategic Change Agenda
Kaplan provides the thesis that people in the organization may not understand
why the vision statement needs a new strategy and why they need to change in order to
achieve the target. Creating a sense of urgency and communicating the need for change
are critical roles for leadership. (Kotter, 1996)
The Strategic Change Agenda compares the current status of several
organizational structures, capabilities, and processes with what they need to become
over the next three to five years and this tool provides the motivation for why
8
transformational change is necessary. (Kaplan & Norton, The Execution Premium,
2008)
Defining the Enhanced Vision
Kaplan states that strategy execution requires an architecture that integrates the
strategies and operations of divers units scattered throughout an enterprise. The
executive team can use a strategy map´s four-prospective framework to define an
enhanced vision, as shown in figure 3. The enhanced vision statement provides a
comprehensive picture of the enabling factors to achieve the vision, including the
customer value proposition, key processes, and the intangible assets of people and
technology. (Kaplan & Norton, The Execution Premium, 2008) It is the link to the
second step of Kaplan model “Plan the strategy”.
Figure 3: enhanced vision with four prospective framework of strategy maps
9
2.1.1.2 Strategic analysis
Once process one is completed the company has a clear picture of what it needs
to achieve. The next process is to perform an external and internal analysis that includes
a comprehensive assessment of the company’s capabilities and performance relative to
its competitors and industry trends.
External Analysis
The executive team needs to understand the impact of macro- and industry-level
trends on the company´s strategy and operations.
The external analysis assesses the macroeconomic environment of economic
growth, interest rates, currency movement, input factor price, regulations, and general
expectations of the corporation´s role in society. A method to fulfill these requirements
to the external analysis is the PESTEL method. (Political, economic, social,
technological, environmental, and legal). The external analysis includes an industry-
level examination of industry economics and competitor assessments, and finally,
includes competitor assessments. (Kaplan & Norton, The Execution Premium, 2008)
Internal Analysis
The internal analysis delivers results about an organization´s own performance
and capabilities. The value chain identifies the sequence of processes necessary to
deliver a company´s products and services to customers. The value chain model helps
a firm identify those activities that it intends to perform differently or better than
competitors to establish a sustainable competitive advantage. (Kaplan & Norton, The
Execution Premium, 2008)
10
A further step is the estimation of an activity-based cost models for each process
in the value chain.
SWOT Analysis
The next step is to conduct a SWOT analysis. The SWOT analysis identifies the
company´s existing strengths and weakness, its emerging opportunities, and the
worrisome threats facing the organization. (Kaplan & Norton, The Execution Premium,
2008)
A SWOT table summarizes these conditions to understand the key issues that
the organization must address when formulating its strategy.
2.1.1.3 Strategic formulation
The last process of the development of the strategy is the strategic formulation.
It contains three major topics.
a) Formulation of the strategy
b) Selection of the strategy
c) Preparing the communication of the strategy
Formulation of the strategy
The literature on strategy formulation and development is overwhelming and
worth its own dissertation. But whatever methodology is used, the outcome from any
strategy formulation approach is to develop a direction that differentiates the company´s
position and offering from those of its competitors so that it can create a sustainable
11
competitive advantage that leads to superior financial performance. (Kaplan & Norton,
The Execution Premium, 2008)
Selection of the strategy
The strategic map framework (see figure 4) can support the process of the
selection of the various strategic approaches.
Figure 4: strategic map for strategy selection
Preparing the communication of the strategy
Kaplan mentioned two tools for the preparation of the communication and the
preparation of the step 2 “plan the strategy” in his system.
2.1.1.3.3.1 OAS Statement
After selecting the strategy a communication plan needs to be set up to
communicate to managers and employees. A good statement of the strategy should
12
contain three fundamental elements (Objective / Advantage / Scope) (Collis D. , 2008).
The objective is similar to the vision statement and it contains a quantitative goal.
Advantage represents what the enterprise will do differently, better, or uniquely
compared with competitors. Scope defines the market segment in which the enterprise
intends to compete and win. (Kaplan & Norton, The Execution Premium, 2008)
2.1.1.3.3.2 Strategy Direction Statement
The executive team can capture the creativity of the strategy development
process and carry it forward using a strategy direction statement, before moving to
the planning process (Kaplan & Norton, The Execution Premium, 2008). The strategy
direction statement spawns three components that are critical to the subsequent
development of detailed plans. (Strategic objectives, Do-wells and Preliminary
measures) (see figure 5) (Kaplan & Norton, The Execution Premium, 2008)
Figure 5: Strategic Formulation Guidelines
13
2.1.2 Step 2: Plan the strategy
The next step in Kaplan´s system is planning the strategy. This process converts
statements of strategic direction into specific objectives, measures, targets, initiatives,
and budgets that guide actions and align the organization for effective strategy
execution. (Kaplan & Norton, The Execution Premium, 2008)
It is based on two main processes.
a) Setting the strategic map including the definition of measures and targets
b) Launching the strategy into motion in form of strategic initiatives portfolios
including the funding of the strategies and establishing the accountability.
Therefore the second step is the entry into strategy execution.
2.1.2.1 Strategy Maps
Figure 6: Strategy map
The strategy map as shown in figure 6 provides an architecture for integrating
the strategies and operations. Kaplan constructed strategy maps upon strategic themes,
collections of related strategic objectives within the map. Most of the strategic themes
14
are vertical combinations of objectives that originate in the process perspective, where
the strategy is executed. A process-based strategic theme can connect upward to
customer and financial outcomes, as well as downward to the enabling objectives in the
learning and growth perspective. (Kaplan & Norton, The Execution Premium, 2008)
This construction from Kaplan is based on his experiences with integrating balanced
score cards into companies. The concept of the BSC method perfectly fits as a basis for
his theory about setting up the strategy map.
Strategic themes split a strategy into several distinct value-creating processes.
(Kaplan & Norton, The Execution Premium, 2008)
A strategy map, organized by several parallel strategic themes, which generally
deliver their benefits over different time periods, enables companies to simultaneously
manage short, intermediate, and long-term value-creating processes. Strategy maps
provide a clear picture of both the desired outcomes of the strategy (in the financial and
customer perspectives) and the critical processes and enabling infrastructure (people,
systems, and culture) required to achieve those outcomes.
The themes more clearly indicate the causal hypotheses within the strategy and
also provide a powerful structure for resource allocation, accountability, alignment, and
reporting. (Kaplan & Norton, The Execution Premium, 2008)
2.1.2.2 Measures and targets
Selecting Measures
The next step in the strategy planning process establishes measures and targets
for each objective.
15
The act of measurement reduces the inherent ambiguity of language. Measures
and associated targets express the objective in specific terms and enable the tracking of
the organization´s progress in achieving that strategic objective. (Kaplan & Norton, The
Execution Premium, 2008)
The balanced score card system provides with his methods a best-practice way
to define and setup these measures and targets. (figure 7)
Figure 7: BSC method for definition of measures and targets
Selecting targets
Targets need to focus on closing company value gaps and achieve the overcome
specified in its vision. Kaplan provides two techniques facilitate target setting:
Split the overall value gap into targets for each strategic theme, and set targets
within each theme based on the cause-and-effect logic of the strategy map.
16
2.1.2.2.2.1 Assigning the value gap to strategic themes
In the vision statement the leader sets a high-level target for the organization.
The target creates a value gap between aspiration and current situation and the goal of
the strategy is to close this value gap. The targets established for each theme reflect the
theme´s relative impact on helping create and deliver the various components of the
strategy. (See figure 8) (Kaplan & Norton, The Execution Premium, 2008)
Figure 8: Example at Customer Bank: Value GAP and target setting
2.1.2.2.2.2 Using Cause-and-effect logic for setting targets
The targets for each strategic theme need to be further subdivided into targets
for the strategic objectives within the theme. Each target for objective should be related
to targets for other theme objectives in a chain of cause-and-effect logic as shown in
figure 9. The cause-and-effect provide a bottom-up, clear, logical test of the strategy´s
feasibility.
17
Figure 9: Cause-and-Effect-Logic
2.1.2.2.2.3 Benchmarking Targets
External benchmarks for performance measures can be useful,
but they need to be treated with care to ensure that the company´s circumstances are
comparable to the conditions under which the external performance occurred. (Kaplan,
Limits to Benchmarking - Balanced Scorecard Report, 2005) External benchmarks
would likely be available for measures in all four perspectives. Internal
Benchmarking could be performed by companies with large numbers of homogeneous
outlets, such as retail-store chains, hotels, banks, and quick-service restaurants, can use
statistical analysis to dentine their targets for processes and employee capabilities.
(Kaplan & Norton, The Execution Premium, 2008)
18
2.1.2.3 Launching the strategy into motion
In this chapter Kaplan gets into the first steps of execution. The predefined
targets represent what the organization wants to accomplish and strategic initiatives
represent the how. Strategic initiatives are the collections of finite-duration
discretionary projects and programs, outside the organization´s day-to-day operational
activities, that are designed to help the organization achieve its targeted performance.
Organizations use three processes to manage their portfolios of strategic initiatives, as
summarized in
figure 10. (Kaplan & Norton, The Execution Premium, 2008)
Figure 10: launching strategy into motion
Strategic initiatives
Kaplan is very clear about the fact that initiatives should not be selected in
isolation from each other. Achieving a strategic objective in the customer or financial
19
perspective generally requires multiple and complementary initiatives from various
parts of the organization. (Kaplan & Norton, The Execution Premium, 2008)
Kaplan continues to recommend, as shown in figure 11, that each
nonfinancial objective has at least one initiative to drive its
achievement but also that the initiatives be bundled for each
strategic theme and considered as an integrated portfolio.
Figure 11: Strategic Initiative Portfolio
A result of Kaplan´s experience is that companies get an immediate benefit from
creating their first strategy map when they perform an initiative review and
rationalization process. Managers should encourage and solicit employees to generate
new initiative ideas, because some of the best initiative ideas come from frontline
employees. A designated group reviews all the new proposals that have been
accumulated and conducts a formal assessment and ranking processes. The team then
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applies a formal process to evaluate and rank the initiatives. The project team refers all
the initiatives and their scores to a leadership team for final discussion, debate and
selection. The final approved list contains the critical few strategic initiatives that will
be funded to drive performance. Strategic initiatives are the short-term actions that
launch an organization on a trajectory toward achieving its vision. Each strategic theme
requires complete portfolios of strategic initiatives if its ambitious performance targets
are to be achieved.
Fund the strategy
Often the funding for strategic initiatives must come from existing budgets, so
Kaplan stated that the success of the strategy will be put in jeopardy, because they must
compete for resources with other projects. Resources – people and funding – must be
provided for each strategic theme´s portfolio of initiatives.
Companies classify spending into either operating expenses (OPEX) or capital
expenses (CAPEX) and a third category, strategic expenses (STRATEX), should be
created to segregate the resources required to implement initiatives that deliver long-
term benefits. (Kaplan & Norton, The Execution Premium, 2008)
STRATEX is designed to enhance the intangible assets that provide
organizational capabilities, such as training and customer databases.
Kaplan and his team recommends that senior executive team determine subjectively,
from their experience and best judgment, a top-down funding level for all strategic
initiatives.
Ideally, the targeted spending on strategic initiatives takes into account the
benefits from funding future performance and balancing these against the risk of
spending too much on initiatives whose future benefits do not yield an adequate return.
21
STRATEX funding for the portfolio or cross-business initiatives is so important
that it deserves a separate authorized line item in the company´s internal budget or
financial forecast. The separate STRATEX line item allows the organization to balance
long- and short-term considerations in its financial forecasting and operating processes.
(Kaplan & Norton, The Execution Premium, 2008)
Figure 12 shows the general approach of integrating STRATEX into the
budgeting process. Figure 13 shows a detailed view on this process.
Figure 12: General View of Budgeting with STRATEX
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Figure 13: Detailed View of Budgeting with STRATEX
Establish Accountability and responsibility
Finally in the process of getting motion into the strategy the establishment of
accountability and responsibility needs to be done. Kaplan stated two factors make this
step a challenge: First, they do not fall within the existing responsibility of any senior
executive, because most strategic themes cross functions and business units. Second the
strategic themes are still plans and they do not produce results until the required changes
are executed at the operational and process levels.
Companies assign some members of the executive team to be the owners of each
strategic theme, giving the theme owners the “night jobs” of overseeing execution of
23
the assigned strategic themes in addition to their day jobs. Kaplan shows in a best-
practice example a way how these challenge can be managed:
Each theme owner leads a theme team whose job is to link the theme´s strategic
objectives to operational tasks. They don´t have authority over functions or businesses.
The theme team has primary responsibility for identifying and funding (from the
STRATEX allocation) the portfolio of initiatives required to execute the theme´s
strategy. After the selecting and allocating resources, it identifies who will be assigned
the task of accomplishing each initiative. Often, the theme team can assign this
responsibility to an existing or organizational unit. The responsibility of some
initiatives which are cross functional, remains with the theme team or is assigned to a
centralized project management office.
By giving high-level authority and accountability to senior executives (the
theme owners), companies can achieve holistic implementation of its portfolio of
strategic initiatives. The theme team also can translate the high-level strategic process
objectives into detailed and actionable sub processes. The final process of linking
strategic themes and short-term initiatives requires that the senior management team
periodically review the execution and results of the strategic initiative portfolios.
2.1.3 Step 3: Align the organization
After Step one Development of the strategy and step two planning the strategy
with step three Kaplan focus on the main issue of his book providing a management
system for aligning strategy with business operations. A first issue in doing this is that
most organizations consist of multiple business and support units, so the management
system must address how strategy is integrated across these diverse organizational
units. (Collis & Montgomery, 1998) In addition to this, the system must align
24
employees with the strategy. Summarized aligning the organization needs three main
processes as shown in Table 1. (Kaplan & Norton, The Execution Premium, 2008)
Table 1: Align the organization process
Kaplan states that the management of the alignment needs to be done in a
process framework because alignment, like the other strategy execution processes,
crosses organization boundaries. To be effective, alignment requires the integration and
corporation of individuals from different organizational units.
2.1.3.1 Align Business Units
Corporations achieve synergies from their collection of operating and business
units in a variety of ways. The four perspectives of the BSC provide a useful taxonomy
for describing the various sources of corporate synergies.
(see Figure 14) (Kaplan & Norton, The Execution Premium, 2008)
25
Figure 14: BSC for aligning the organization
In the strategy map and scorecard the theory in form of how to generate
additional value by having business units operate together is documented.
Once defined, the corporate strategy map can be cascaded to divisions, business and
support units, and departments to coordinate the value-creating activities at all these
organizational units as shown in Figure 15. (Kaplan & Norton, The Execution Premium,
2008)
26
Figure 15: vertical and horizontal alignment
Kaplan stated, that between these two polar situations – complete operating unit
autonomy and complete adherence to corporate-determined strategy and metrics – are
the majority of other companies. Their strategy maps and scorecards of such operating
units contain many objectives that are unique to local operations, but they also contain
several that reflect corporate-level priorities and objectives shared with other operating
units. The operating unit head must maintain a balance between local optimization, as
if the unit were an autonomous company, and the unit´s contribution to corporate and
other business unit´s objectives that generate the corporate synergies.
2.1.3.2 Align Support Units
Kaplan describes the framework for the aligning of support units as “Support
and shared-service units, such as human resource, information technology, finance, and
27
planning, develop their strategy maps and BSC to enhance the strategies of the
operating units they support.”
Support units follow a systematic set of processes to create alignment:
First internal support units must understand the corporate and operating unit strategies.
Next, they align their strategies with the business unit and corporate strategies by
determining the set of strategic services to be offered. Often this is formulized with a
service-level agreement, a performance contract between the support and business
units.
The support units’ financial perspective contains objectives that reflect how the
unit contributes to the company´s costs reduction, revenue growth, or asset utilization
objectives.
In crafting the objectives on its strategy map and BSC, the support unit must
identify how it contributes to the value-creating strategies of its business unit partners
and any other constituencies it services. (See figure 16) (Kaplan & Norton, The
Execution Premium, 2008)
2.1.3.3 Align Employees
Ultimately, effective strategy execution requires that employees be personally
committed to helping their enterprise and unit achieve strategic objectives. The process
to align employees with the strategy requires three steps:
a) Communicate and educate employees about the strategy.
b) Link employee´s personal objectives and incentives to the strategy
c) Align personal training and development programs to provide employees
with the knowledge, skills, and competencies they need to help implement
the strategy.
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Communicate and Educate About the Strategy
Communication of mission, values, vision, and strategy is the first step in
creating motivation among employees. Executives can explain with using a Strategy
map and BSC what the organization wants to accomplish and how it intends to realize
its strategic outcomes. (Kaplan & Norton, The Execution Premium, 2008)
Communication also helps share the culture. Cultural massages might include a
commitment to performance and accountability, a focus on customers, and a relentless
passion for continuous improvement, or creativity and innovation.
Communication by leaders is critical. Employees cannot follow if executives do
not lead. Managers’ report that they must communicate seven times, in seven different
ways. The communication best practices in the most successful enterprises have certain
characteristics, in which senior executives personally lead the communication process.
(Johnson, 2007)
Link Personal Objectives and Incentives to the Strategy
Kaplan stated that the most successful BSC implementations have occurred,
when organizations skillfully melded the intrinsic motivation emanating from its
leadership and communication program with the extrinsic motivation created by
aligning personal performance objectives and incentive compensation.
After receiving communication, education, and training about the strategies of
their unit and enterprise, employees develop personal objectives that are aligned with
the strategic objectives.
Annually, employees validate their personal strategic objectives with the help of
their supervisors and HR professionals. Typical incentive plans include two or three
kinds of awards:
29
a) an individual award based on achieving targets established annually for each
employee´s personal objectives,
b) an award based on the employee´s business unit,
c) an award tier for divisional or enterprise performance.
(Kaplan & Norton, The Execution Premium, 2008)
Develop Employee Competencies
Employees must develop the competencies – the knowledge, skills, and values.
The development of knowledge and skills to employees through training and
development programs, along with career planning is a proper way to lift up the
competency profiles of the employees.
Instilling values requires a combination of taking good inputs through careful
recruitment and selection programs to inspire the behaviors that the corporation desires.
(Kaplan & Norton, The Execution Premium, 2008)
2.1.4 Step 4: Plan Operations
The next step in Kaplan´s management system is planning the operations. This
step is the main foundation of the focus of his theories execution premium. It is the link
between the strategy and the execution of it in form of operational business. Or
otherwise the output of the plan in form of an operational plan is the basis for the
execution. This output is strongly linked and influenced to the output of the first three
steps, the strategic plan. Planning the operations has two main processes as shown in
Table 2. (Kaplan & Norton, The Execution Premium, 2008)
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Table 2: Main process in planning operations
In this chapter Kaplan shows the process for performing these two processes and
also highlights the output of these two processes: the operating plan with its four major
documents: dashboards, sales forecast, resource requirements and budgets.
2.1.4.1 Improve Key Processes
Strategy execution requires alignment and execution of both strategic initiatives
and process improvement programs.
Quality and process improvement programs existed well before the introduction
of the BSC. (TQM, lean management, just-in-time, six sigma) The reengineering
movement occurred in the early 1990s, almost all enterprises were implementing
quality and process improvement initiatives.
Organizations can use the strategic objectives on their strategy map and
scorecards to enhance and align their process management program. Quality models
often focus on local, tactical, and unlinked process improvement.
The BSC provides explicit causal links from quality and process improvements to
successful outcomes for customers and shareholders.
31
The cause-and-effect relationships in a strategy map and the strategic objectives
on the BSC highlight the process improvements that are most critical for successful
strategy execution. Aligning quality and process improvement programs with strategy
starts with the value proposition. (Kaplan & Norton, The Execution Premium, 2008)
Identifying Strategic Processes for Improvement
In Addition to improving existing processes, a newly created strategy map often
identifies entirely new processes at which the company must excel. Quality and process
improvement projects will generate the highest payoffs when they are selected based
on criteria linked to the company´s strategic objectives. Kaplan stated that companies
should emphasize improving those processes that contribute the most to the success of
the company´s strategy.
Strategic Versus Vital Processes
Figure 16: Link between process improvement and BSC strategic priorities
Figure 16 shows the link between process improvement and BSC strategic
priorities. The columns classify the organization´s existing processes as either
“excellent” or “need improvement” and the rows distinguish between processes
identified on the BSC as “strategic” - contributing to the differentiation of the
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company´s strategy - and those that are “vital” – necessary for the company´s success
but not creating a strategic difference.
The strategic processes will receive continual review and attention from senior
management in their monthly strategy review meetings. These reviews are important
component of what Bob Simons calls the company´s interactive system.
The vital processes are also important, and the reporting and feedback on them
with respect to the performance are included in Simon´s diagnostic system. The
diagnostic system conserves management attention by operating under management by
exception.
Define Priorities for process management
First step of setting the priorities is to identify the gap between the existing
process capabilities, developed to support the previous strategy, and the process
performance required for the new offering. It is the goal to close this strategy gap by
enhancing existing processes and introducing some entirely new ones.
The next step is to drill down to process management by identifying the key
process objectives on the strategy map as shown in Figure 17. (Kaplan & Norton, The
Execution Premium, 2008)
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Figure 17: linking process management to BSC strategic processes
After that, the key performance (process) indicators (KPIs) that drive process
excellence, needs to be identified. The BSC metrics are outcome (or lagging) indicators,
which provide feedback.
In the next step, the critical success factors (CSFs) will be set up. Selecting the
CSFs along with metrics to make the CSFs operational is the major focus in this
process. The metrics can be displayed on a process
dashboard to improve the performance of subprocesses. Dashboard metrics are the
operational performance indicators that lead, via a cause-and-effect relationship, to
process excellence. This complete process is shown in Figure 18. (Kaplan & Norton,
The Execution Premium, 2008)
34
Figure 18: BSC linked with CSF and metrics
Dashboards
Enhancing the process improvement by designing and deploying local
operational dashboards is a proper way for monitoring and visualization of the
improvement status in process management. Dashboards are a collection of key
indicators that provide feedback on local process performance. Although all processes
benefit from systematic measurement and reporting, dashboards are most effective
when they highlight the processes from the unit´s BSC process perspective. Dashboards
differ from BSC in several ways. Dashboards are operational, not strategic. They focus
on process metrics that employees can affect in their daily actions. BSC metrics are
outcomes, which are updated monthly or quarterly, dashboards can reflect daily and
even hour-by-hour performance. (see Figure 19). (Eckerson, 2006)
35
Figure 19: Link between Strategy Map, cause-and-effect model and dashboards
Such rapid feedback helps employees learn from their experience. Dashboards
also focus on local departmental, functional, and process performance, in contract to
the cross-business and cross-functional outcome indicators on the BSC. Dashboards
data also are prime informational input for focused operational review meetings.
Finally and additional to the dashboards process improvement activities are no
local projects. A leverage of the process improvement capabilities by sharing best-
practice experiences across all organizational unit is needed for an optimal overview.
2.1.4.2 Develop the resource capacity plan
In this chapter Kaplan presents an integrated approach for linking the strategic
plan to forecasts for spending on operating and capital resources.
This process ensures that resource capacity, operational plans, and budgets reflect the
direction and needs of the strategy.
Kaplan stated that the classic way of the budgeting process to coordinate and
control the diverse business units has the following fatal weakness.
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Creating a budget takes excessive time and money.
A budget motivates managers to make lowball estimates of revenues and
income for fear of the consequences from managers if they fall short on any
budget target.
It stifles innovation.
It quickly becomes obsolete in a rapidly changing, globally competitive
business environment.
Targeted management control process
Bogsnes and Boesen replaced the budget with an integrated suite of four targeted
management control processes (Figure 20). The new management system delivered the
capabilities of the traditional annual budget and also providing a much broader set of
capabilities at lower cost and without budgeting´s dysfunctional aspects. (Jorgenson,
2001)
Figure 20: Integrated suite for targeted management control processes
37
2.1.4.2.1.1 Rolling Financial Forecast
The forecasts were intended to provide an unbiased estimate of future sales and
expenses and had no implications for the measurement of managerial performance. The
forecasts were basically back-of-the-envelope calculations, including updates of the
mail profitability drivers: volumes and prices.
2.1.4.2.1.2 Balanced Scorecard
BSC is used to communicate strategic objectives and measures to employees. It
encouraged employees to set personal objectives that would be linked to corporate
strategy. Performance of business units on the key indicators was benchmarked
internally and externally. (Kaplan & Norton, The Execution Premium, 2008)
2.1.4.2.1.3 Controlling Fixed Costs
In the Case Study of Borealis the budgeted line-item expense and departmental
cost controls were replaced with activity-based costing (ABC), a cost management tool.
The ABC model traced and accumulated line-item operating expenses into process
costs and then to product and customer costs. ABC provided a common language for
describing costs and for benchmarking process costs across plants and with other
companies.
2.1.4.2.1.4 Investment Management
Kaplan refers to the model of Borealis. They eliminated centralized capital
budgets and gave decision making and control to the managers and employees who
38
were closest to the marketplace and customers. They segregated investment project
approval by size of project. Then they tracked the cost of these small investments as a
component of the twelve-month moving average of ABC. Medium-sized investments
had to exceed a hurdle rate, and the executive board approved centrally the largest
investment projects.
Linking the strategy plan to a resource capacity plan and operating
budget
A comprehensive framework integrates strategic planning with resource
allocation, financial forecasting, and ultimately, a dynamic budgeting process. The
framework´s key innovation is a time-driven activity-based cost (TDABC) model to
link strategic planning to operational and capital budgeting. The framework consists of
five following five steps. The basis for the model is Time-driven Activity-based costing
by R.S. Kaplan and S.R. Anderson. (Anderson & Kaplan, 2007)
2.1.4.2.2.1 Step 1: Use driver-based revenue planning to obtain sales forecasts
Companies need updated forecasts for several purposes. Public companies want
to avoid unfavorable surprises with their investing and analyst communities. An
unhappy surprise leads to loss of confidence in senior executive boards. So Kaplan
stated, at a minimum, companies should continually reforecast their results to keep
market expectations in line with the most likely reported financial performance.
Valid forecasts are vital for short-term financial planning. Changes in sales and
expenses affect the receipt and disbursement of cash. The treasury office needs accurate
forecasts of near- and intermediate-term cash receipts and expenditures.
39
The quarterly rolling forecast update is not a budget done four times a year.
Managers do not have to forecast line-item expenses. They can drive costs and expense
forecasts directly from detailed revenue forecast.
Forecasting revenues remains a difficult process, much more complex than forecasting
costs. Several companies get excellent results from an approach called driver-based
planning, in which managers build a structural model, typically using extensive
nonfinancial data, to predict sales.
To produce a driver-based revenue model, each company must develop its own
analytic capabilities. The company develops its sales forecast from the following six
key drivers:
1. New product performance
2. Advertising performance
3. Sales promotion
4. Price performance
5. Sampling performance
6. Distribution
While the process described above works well for a moving consumer goods
company, a company in a different industry will have a completely different revenue
model, a different supply chain, and different causal and macroeconomic factors that
influence customer´s purchasing decisions. Thus, driver-based revenue planning is far
from trivial.
Kaplan recommends that managers drive the cost and expense estimates directly
from the sales forecast. Once a sales and production forecast are produced, they can
enter the forecast into a time-driven activity-based (TDABC) model that analytically
40
forecasts the supply, and hence the costs, of internal resources that will provide the
capacity to deliver on the sales and production forecasts.
In summary, the first step in the planning operations stage concludes with
managers producing a high-level sales forecast for upcoming periods. This forecast
drives the operating plan in the next steps.
2.1.4.2.2.2 Step 2: Translation of sales forecast into sales and operating plans
The next step is to translate the aggregate sales forecast into a more detailed
expected operating plan for its next period of operations.
A detailed operating plan provides the essential input into a resource capacity
planning model. An ERP-equipped (enterprise resource planning) company can use a
baseline of recent experience from which to project into the future. To reflect the
inherent uncertainly in forecasting a detailed ordering, production, and delivery
schedule, managers should embrace scenario planning by developing optimistic, most
likely, and pessimistic.
2.1.4.2.2.3 TDABC Model for Forecasting Resources Capacity
This step is the key innovation in linking a strategic plan to an operating plan. It
requires that a company has a time-driven activity-based costing model in operation.
TDABC assigns costs to products, services and customers based on two fundamental
parameters:
First, the cost of supplying resources capacity in each operating department and
process, measured as the costs of resources supplied to the department divided by the
41
practical capacity (measured typically by the time available for productive work each
period).
Second: the capacity (time) required from each department or process to handle
the product or customer transaction.
Managers realize a major additional benefit of the company´s TDABC model in
form of the ability to quickly forecast and budget the needed supply of resource
capacity.
Assuming that a TDABC model exists, the planning group modifies the model
to reflect process improvements expected to occur in the forecasted period.
This step links the quality and process improvement activities to the planning
and budgeting process.
Kaplan stated that in this way, the company´s continuous improvement activities
become embedded in the budgeting process. After the model´s resource consumption
estimates have been adjusted for the forecast process improvements, the planners enter
the detailed sales and operating plan for the forecasting period into the model. By
feeding forecast sales and operations data into the TDABC model, planners transform
ABC from a snapshot-taking exercise to a management tool for influencing future costs
and profitability.
Kaplan provides an example from TFS that shows how the TDABC model has
enabled the company to translate its sales and operating plan into forecast demand for
capacity (time) for all its personnel and computing resources.
42
Table 3: Example of TDABC - step 1
In the next step (Table 3) the process continues by dividing the total
demand for capacity of each resource by the quantity of capacity supplied by each unit
of the resource each month.
Table 4: Example of TDABC - step 2
In this way, the TDABC model forecasts the quantity of resource units required
to implement a future period´s operating plan. “Resource Units required” in the column
represent the resources demanded by the operating plan. In effect, it is the “bill” that
the company must pay to deliver on its sales plan.
The calculations in the last two figures use a single-point forecast of the
operating plan, but the company´s planners should explore a variety of possibilities, not
43
just a single forecast, to give them a sense of the range of resources required to meet a
likely range of outcomes.
In general, companies should supply somewhat more capacity than the forecast
by the deterministic TDABC model. To avoid queuing and delays, some buffer amount
of resource capacity may be desirable.
The planning group translates each quarter´s forecast into a detailed sales and
operating plan, update the TDABC model for expected efficiency improvements in that
quarter, and run the structural TDABC model to predict resource demand for that
quarter.
In this way, the company gets an advanced look at where resource shortfalls may
occur (personnel) and can also start the capital acquisition process to ensure adequate
levels of physical capacity (space, servers, bandwidth, and production and distribution
equipment).
This is the process by which almost all organizational costs became, as
economists say, “variable in the long run”. The incentives seem to be aligned for
managers to generate unbiased revenue forecasts in this process so that they can make
good decisions about the quantity of resource capacities to supply into future period.
In summary, a company, in step 3, uses projected sales and operating plans for
the upcoming period to forecast the demand for time from employees and the demand
of time and space from tangible resources, such as property, plant, and equipment. The
resource demand model comes from updating the historical TDABC model for known
and forecast process improvements so that the resource forecast incorporates the most
contemporary thinking about future sales, operations and process efficiencies.
Company planners then run their detailed sales and operating plan through the TDABC
model to predict and adjust the level of supplied resources for future periods.
44
2.1.4.2.2.4 Develop the forecast of OPEX and CAPEX
Kaplan refers to the estimated financial spending in a future period as the budget
for that period, using the word budget to describe an estimate of future expenses rather
than its connotation as a fixed performance target.
The result is a budget that has been derived quickly and analytically from the
sales and operating plan, rather than imposed by fiat or through power negotiations.
The process described here is exactly analogous to material resource planning (MRP)
introduced to manufacturing companies in the 1980s. The resource capacity planning
process extends the MRP model to forecast all resource capacity demand. It explodes
the detailed sales and operating plans into the total demand for all resources. The
spending to supply employees and to operate equipment and facilities is generally
classified as OPEX and to acquire space to support growth in future operations as
CAPEX.
Table 5: Example of TDABC - step 3
The company needs one additional set of estimates: the forecasts of the level of
discretionary spending in items such as research, development, advertising, promotion,
training, and strategic initiatives (STRATEX). The forecast spending on these
discretionary items does not bear a tight causal relationship with sales and operating
levels, and therefore it requires a parallel calculation along with the quarterly update of
45
revenues. The spending on such discretionary items remains a judgment call by
experienced executives.
2.1.4.2.2.5 Step 5: calculate profitability
The TDABC model supplies, essentially for free, the detailed profit-and-loss
statement (P&L) for each product (see Table 6), customer, and region. By going back
to the detailed sales and operating plan, the model automatically attributes the supply
and cost of each resource type to the transaction, product, or customer that triggered the
demand.
Table 6: Example of TDABC - step 4
Summarizing Kaplan´s 5-step method starts with quarterly sales forecasts for
the next several periods. In the next step, planners translate high-level sales forecasts
into detailed sales and operating plans. In a third step, the detailed sales and operating
plans are converted, through a time-driven activity-based cost model, into the forecast
demand for capacity of the company´s primary resources. In step 4, planners simply
and accurately translate the authorized level of resource supply into budgeted operating
and capital expenses for the upcoming periods. In step 5, the pro forma profit-and-loss
46
statement, is aggregated for the business unit or company and by product, service,
customer, channel, and region.
This series of logical and tightly linked steps provides a mechanism for
translating high-level sales growth targets into detailed plans for authorizing resource
capacity, and in step 5, estimating the near-term operating profitability, by products,
customers, and regions, from the strategic plan.
2.1.5 Step 5: Monitor and Learn
In this chapter Kaplan´s provides concepts how to monitor the execution and the
linking of the strategy and operations.
The enterprise needs to continually monitor and adjust its performance to achieve
strategic objectives. Managers' aim is to review the strategy and to adjust or transform
it as needed.
In the language of total quality management, the various management meetings
are the check and act portions (from PDCA cycle) of the strategy implementation
process. Companies need to clearly separate the agendas and participants at their
management meetings. (see Table 7) (Kaplan & Norton, The Execution Premium,
2008)
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Table 7: Overview of Monitor and Learn Meetings
Operational review meetings examine recent departmental, functional, and
financial performance and address immediate problems that must be solved.
Strategy review meetings examine indicators and initiatives from the unit´s
BSC to assess the progress, barriers, and risks associated with the successful
implementations of the strategy.
Strategy testing and adapting meetings discuss whether the strategy is
working and whether its fundamental assumptions remain valid in light of data that
have been collected on strategic measures. Details to this topic are presented in the last
step six of Kaplan´s management system. (Kaplan & Norton, The Execution Premium,
2008)
2.1.5.1 Operational Review Meetings
Operational review meetings assess short-term performance and respond to
problems that have arisen recently and need immediate attention.
48
The frequency of these meetings should be determined by the operating cycle of the
department and business and by how quickly management wants to respond to sales
and operating data as well as to the myriad of other tactical issues that continually
emerge.
The attendees of most operational review meetings come from a single
department, function, or process. Operational meetings should be short, highly focused,
and action oriented. Many companies´ operational review meetings devote too much
time to distributing and presenting data, best-practice organizations distribute reports
in advance or make the underlying data accessible through Web-enabled information
technology. The meetings should be based on valid operational data. The meetings
focus on near-term operational issues and generate actions that can be taken
immediately to address the problems. Operational review meetings focus on
departmental and process performance and provide opportunities for feedback, problem
solving, and learning. (Kaplan & Norton, The Execution Premium, 2008)
2.1.5.2 Strategy Review Meetings
In strategy review meetings, the members of a business unit´s leadership team
come together to monitor and discuss the progress of the unit´s strategy. The discussion
focuses on whether strategy execution is on track, identifies the risks of successful
strategy execution, detects where problems are occurring in the implementation,
attempts to determine why the problems are occurring, takes actions to correct the
cause, and assigns responsibility for achieving the targeted results. Strategy review
meetings require mandatory attendance and a commitment to start and end meetings on
time.
49
Executive committee members should be core participants in the strategy review
meetings, with people added over time who have either a comprehensive strategic
perspective or in-depth knowledge of an important function.
Assigning responsibility for individual strategic themes to new committee
members is an excellent way to give them legitimacy comparable to that of the
traditional members, who have an existing power base. (Kaplan & Norton, The
Execution Premium, 2008)
To differentiate the focus of this body, Kaplan refers to it as the strategy council.
As with operational review meetings, the strategy council´s time should not be spent
listening to report presentations. Strategy council members should discuss issues, solve
problems, and propose action plans.
One current best practice is for the agenda to include a quick overview of the
entire scorecard. In this way, the executive leadership team can identify any strategic
issue requiring its immediate attention, devote some time to discussion of monthly
financial performance, and spend the bulk of the time in a focused deep dive into one
of the other three BSC perspectives or a single strategic theme.
Figure 21: structure for a strategy review meeting
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2.1.6 Step 6: Test and Adapt
The last step of Kaplan´s management system for linking strategy to operations
is dedicated to the topic of testing and adapting the strategy in the context of operational
execution.
A strategy map and BSC make explicit the linked hypotheses underlying an
organization´s strategy, but apart from a company´s ability to execute its strategy, it
cannot be certain that the assumptions and hypotheses underlying the strategy are valid.
A principal benefit of implementing a strategy with a BSC is that company can use the
scorecard data to periodically assess whether its strategic hypotheses are valid. (Kaplan
& Norton, The Execution Premium, 2008)
2.1.6.1 Strategy testing and adapting meetings
Kaplan stated that strategy testing and adapting meetings are designed for the
executive team to learn about the validity of the strategy – not only its execution – and
to modify and adapt the strategy over time. A well-formulated strategy map, with its
accompanying BSC, represents a linked and comprehensive set of assumptions about
how the strategy will create and sustain long-term shareholder value. Kaplan stated that
every company should, at least annually – and perhaps as often as quarterly – conduct
a separate meeting to assess the performance of its strategy and consider the
consequences of recent changes in its external environment. This meeting can and
should be the same meeting described in the first step of his system for developing a
new strategy. The output of the strategy testing and adapting meeting can be to reaffirm
the existing strategy, in which case the executive team updates targets, reprioritizes
strategic initiatives, and transmit new expectations to business units and functions. The
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current strategy meeting participants must also consider changes in external conditions.
The executive team needs to assess whether such changes require abandoning or
modifying the strategy in significant ways.
The strategy testing and adapting meeting provides an ideal time for the
executive team to consider ideas about strategy visions and initiatives that have
emerged from within the organization. Companies should actively solicit and assess
ideas for new strategic options so that they can benefit from the awareness of the
strategy by all employees in the enterprise and their motivation to help it succeed.
2.1.6.2 Operational feedback for testing the strategy
The strategic planning department conducts a PESTEL analysis to bring together
external data, which need to be updated to reflect changes that have occurred since the
last strategy update meeting in political and external macroeconomic conditions. The
executive team also needs detailed data on the company´s current performance.
Granular P&L data give companies much more visibility into the strengths and
weakness of their current performance.
Companies can enhance their strategy review process by examining the existing
microeconomics of their individual products and customers, along with the statistical
correlations between the assumed drivers of their strategies and the outcomes they are
experiencing. (Kaplan & Norton, The Execution Premium, 2008)
2.1.6.3 TDABC models of product and customer profitability
The ultimate test of any strategy is whether it makes more money for the
company. But rather than working only with a highly aggregated income statement to
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determine whether it is making money, the company should calculate individual
product, customer, segment, channel, and regional P&L statements. Computer-based
TDABC models deliver individual P&Ls accurately and at low cost, facilitating such
strategy reviews. It targets those areas where profit enhancements are most needed and
are most likely to be realized. (Kaplan & Norton, The Execution Premium, 2008)
2.1.6.4 Statistical testing of operational linkages
Measuring whether the company´s value proposition and cost structure have
produced profitable customer relationship is one powerful test of a strategy. Another
test, complementary to the ABC test, is to examine statistically the linkages among
improvements in the BSC metrics. The strategy map hypothesizes that improvements
in learning and growth metrics should lead to improvements in process metrics, which,
in turn, should lead to improvements in customer and financial metrics. With data
collected from the strategy´s BSC, statistical analysis can test whether a variable,
assumed to have a strong positive connection to a customer or financial outcome,
actually has zero or a negative correlation with these strategy outcome indicators. Such
a finding would signal to the executive team that some of the assumed logic in its
strategy may be invalid.
The requirements for formal statistical testing are:
The companies had multiple observations per time period.
The companies had disciplined processes for collecting data from each site about
customer satisfaction and loyalty, process characteristics, and employee
attitudes and skills.
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Having the capability to perform the statistical analysis in a valid and credible
manner
Companies that want to use their BSC data to test strategic hypotheses should
have an internal group or external consultants who are well trained and experienced in
designing, estimating, and testing statistical models.
2.1.6.5 Emergent strategies
Several strategy scholars emphasize the limitations of top-down strategic
direction. (Mintzberg & J. Waters, 1985). They argue that some of the best ideas for
new strategies come from employees within the organization. The role of senior
management is to be ever alert to innovative ideas that employees, who are close to
technologies, processes, and customers, can suggest even when these suggestions
originate outside the official strategy planning and review process. (Kaplan & Norton,
The Strategy-Focused Organization, 2000)
Employees who understand about the strategy are in an excellent position to see
where gaps exist either in strategy implementation or in an underlying hypothesis. They
may even identify where a new strategic approach might yield better performance.
2.1.6.6 Back loop from operations to strategy
Strategy maps and BSC help organizations link strategy to operations and
managers to communicate the strategy in both visual and quantitative terms, however
less well celebrated, is the link from operations back to strategy. Table 8 summarizes
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the three management meetings which provide the feedback from operations to
strategy.
Table 8: Overview of Reviews, Testing and Adaption
2.1.7 The office of strategy management
2.1.7.1 The need of the OSM
The six management processes have many moving parts and interrelationships,
and it requires simultaneous coordination among all line and staff units (see Figure 22).
On top the organizations face a complex task to implement such a complex, interrelated
system of mature and newly introduced management processes.
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Figure 22: overview of tasks in the management system
For that reason Kaplan and his team identified the need for a new organizational
function, which they call the office of strategy management (OSM), to be the process
owner of the strategy execution system, because few organizations identify an
individual or department to run the multiple linked processes of the strategy execution
system.
2.1.7.2 Roles of the OSM
The new office of strategy management plays three generic rolls. First, the OSM,
as architect, designs the new strategy and operational management processes. Second,
the OSM is the owner of many of the key processes in the management system.
Third, the OSM serves as an integrator to align all diverse processes with the strategy.
Figure 23 gives an overview and shows the relations of these three roles. (Kaplan &
Norton, The Execution Premium, 2008)
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Figure 23: Roles of the OSM
The OSM as Architect
The OSM is the designer of the framework and processes for a single, integrated,
closed-loop strategy planning and operational execution system its tasks include
introducing the missing strategy execution processes and bringing order to an otherwise
incomplete and fragmented collection of management processes. The OSM creates the
design for the sequence and linkage of strategy execution processes shown in Figure
24. (Kaplan & Norton, The Office of Strategy Management, 2005)
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Figure 24: Sequence of strategy execution
In parallel with sequencing these annual processes, the OSM oversees several
continual control and learning processes: communicating strategy, reviewing
operations and strategy, managing strategic initiatives, and sharing best practices. The
OSM monitors all these components to ensure that they are in place, introducing any
missing ones and establishing the links that must exist between them.
The OSM as Process Owner
On an ongoing basis, the OSM should have primary ownership of the following
strategy execution processes. Kaplan describes the Roles with the following main
thesis.
Developing the strategy – Encourage an expansion of the strategic planning
department into a more comprehensive office of strategy management that has
responsibility for facilitating both strategy development and its execution.
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Planning the Strategy – By owning the scorecard process, the OSM ensures
that any changes made at the annual strategy planning meeting are translated into the
company´s strategy map and BSC. The OSM coaches the executive team in selecting
performance targets on the scorecard measures and identifying the strategic initiatives,
and then standardizes the terminology and measurement definition, and selects and
manages the scorecard reporting system, and monitors the integrity of the scorecard
data. The OSM serves as the central scorecard resource, consulting with units on their
scorecard development and conducting training and education on building strategy
maps and scorecard.
Aligning the Organization – The OSM oversees the processes to cascade
strategies and scorecards vertically and horizontally throughout the organization.
Reviewing the Strategy: Managing the new strategy review meeting is a core
function of the OSM.
Adapting the Strategy – An analysis which strategy testing and adapting
meeting requires, is that the sophisticated analytics to statically estimate and test
strategic linkages. The OSM is a natural hole for building a corporate capability to
analyze data coming from BSC.
The OSM as Integrator
The OSM ensures that near-term planning and budgeting are aligned with
strategic priorities and the strategy is communicated and internalized by the workforce.
In detail the following fields are in scope for the role as an integrator:
Linking Strategy to Financial Resource Planning and Budgeting – The OSM
integrates with finance to ensure that business unit profit plans, resource capacity
planning, and performance targets are aligned with strategic objectives.
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Aligning Plans and Resources of Important Functional Support
Departments – The OSM plays a consulting and integrating role with these functional
departments to help them align their strategies and plans with enterprise and business
unit strategy.
Communicating the Strategy – If the communication task is assigned to an
existing communication department, the OSM plays an editorial role and if not,
becomes the process owner for communicating both strategy and the scorecard to
employees. The OSM coordinates with HR department to ensure that education about
the scorecard and employees´ role in delivering performance is included in employee
training programs.
Managing Strategic Initiatives – When the organization uses theme owners
and theme teams to manage selection and management of strategic initiatives, the OSM
monitors the process, soliciting information about initiative status and performance and
reporting this information to the executive team, when the organization doesn´t use
them, the OSM is the default mechanism for running the team process to select and
rationalize strategic initiatives.
Linking Strategy to Key Operating processes – The OSM works with theme
teams, local line management, and the quality management department to see that
necessary resources and organizational support have been provided to improve the
performance of the strategic processes.
Sharing Best Practices – The OSM must take the lead in transferring ideas and
best practices throughout the organization.
(Kaplan & Norton, The Execution Premium, 2008)
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Balanced Score Card: Translating strategy into action
Since the reference Balanced Score Card is a basis for the assumptions of
Kaplan´s Execution Premium, the main issues of the reference will be described in the
following chapter for a better understanding, even though it is not a focus topic of this
dissertation
The Balanced Scorecard relies on four perspectives. It is a management tool for
planning strategies and link them to operational measurements.
2.2.1 Perspective One: “Financial Perspective”
Kaplan stated that building a balanced scorecard should encourage business units to
link their financial objectives to corporate strategy or wise worse. The financial
perspective can be defined within the following measures:
“Revenue growth and mix” – measured by sales growth rates of the company
and market share for target regions.
“New products” and “new applications” – measured by the percentage of
revenue from new products and services introduced in a special time period versus the
percentage of existing products and services. New applications is a measurement of the
number of evaluating existing products to new designs.
“New customers and markets” – measured by the percentage of revenue with
new customers in a defined time period or won market share within a new defined
market segment.
“New relationships” – measured by the amount of revenue from cooperative
relationships with partner companies.
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“New pricing strategy” – measured by the part of revenue earned by changing
the pricing strategy e.g. cut discounts.
“Increased revenue productivity” – measured by two different scenarios: first
for companies or business units in the growth stage the measurement should be the
revenue enhancement, companies with stabile business should measure cost reductions.
“Reduced operating expenses” – measured by the amount of operating
expenses per product, service or process.
“Cash-to-cash cycle” – measured by the ratio between getting revenues paid by
customers and paying vendors.
(Kaplan & Norton, The Balanced Scorecard, 1996)
2.2.2 Perspective Two: “Customer Perspective”
The second perspective Kaplan describes is the customer perspective. This
perspective describes the link of strategic objectives to customer and market values. As
organizations invest in acquiring these new capabilities, their success (or failure) cannot
be motivated or measured in the short run by the traditional financial accounting model.
(Kaplan & Norton, The Balanced Scorecard, 1996). Or otherwise customer needs in
form of product and service requirements are a long-run success-factor for the
company.
Typical measurements Kaplan pointed out in this area are
- market share
- customer retention
- customer acquisition
- customer satisfaction
- customer profitability.
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2.2.3 Perspective Three: “Internal Business-Process Perspective”
In this chapter Kaplan focuses on internal operations processes and how
companies design their process for producing products or serving services. Also
business processes like sales and administration processes need to be measured. Typical
measures are:
- the capability of the production line
- time to market for the development of products or services
- process times for acquisitions.
2.2.4 Perspective Four: “Learning and Growth Perspective”
The fourth perspective is dedicated to the HR-sector. Without optimal skilled
workers all other strategy goals cannot be achieved. Kaplan stated that beyond
investments into new products, production lines, research and development, the
investment in employee capabilities, IT systems and infrastructure and in an
environment of motivation is the basis for successful companies and therefor an own
strategic perspective. Typical measures named by Kaplan are:
- assessing worker satisfaction
- productivity levels
- training and skill levels
- level of performance-improvement
- level of individual performance goals reached
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2.2.5 “Feedback and the Strategic Learning Process”
Kaplan and his team stated that the setting of a “shared strategic framework”
need to be performed. Meaning that companies need to develop systems encouraging
organization-wide strategic learning and feedback loops and move away from
hierarchical management systems. Employees deserve to know the strategy and the role
they play. (Kaplan & Norton, The Balanced Scorecard, 1996)
The strategy-focused organization
The reference strategy-focused organization is no direct focus topic of the
dissertation, but a main basis for the assumptions of Kaplan´s Execution Premium. For
that reason the main issues out of the reference will be described.
As described in chapter 2.2. the balanced scorecard is a very useful instrument to plan
strategy and make it measureable. Kaplan stated in his book the strategy-focused
organization that beyond using the tool the need for a change in the organizational
structure is needed to succeed the operationalization of strategies. These changes to a
strategy focused organization are described with respect of using the balanced scorecard
within a framework of five principals as shown in the below figure.
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Figure 25: Five principles of strategy-focused organization
2.3.1 Principle 1: “Translate the Strategy to Operational Terms”
The Balanced Scorecard provides a framework to describe and communicate
strategy in a consistent and insightful way. (Kaplan & Norton, The Strategy-Focused
Organization, 2000). This definitions are the basis for company-leaders to break down
strategy goals to operational goals. Kaplan provides the tool of strategy maps for the
transfer of strategic goals to tangible and non-tangible assets. Tangible assets are much
easier to measure than intangible assets like knowledge or process improvement. The
value of intangible assets mostly rise by bundling them with other assets and streamline
them to an overall strategy.
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2.3.2 Principle 2: “Align the Organization to the Strategy”
Synergy is the overarching goal of organization design. For organizational
performance to become more than the sum of its parts, individual strategies must be
linked and integrated. (Kaplan & Norton, The Strategy-Focused Organization, 2000)
Organizations based on functional departments are a major barrier for strategy
implementation and with the transformation to a strategy focused organization this
barrier needs to be broken.
Kaplan states that the main issue within this principle is to break down the functional
structure (hierarchy, reporting, goal-setting) and replace them with strategic themes and
priorities. He defines two possible ways performing this break down. First “The
strategic partner model” – where business and shared units work under partnership
conditions and develop corporate balanced score cards. Second “The business-in-a-
business model” – business units don’t develop and execute their own balanced score
part but are part of other scorecard goals coordinated by shared service units. (Kaplan
& Norton, The Strategy-Focused Organization, 2000)
2.3.3 Principle 3: “Make Strategy everyone’s Everyday Job”
Strategy-Focused Organizations understand well the importance of engaging
and aligning all of their employees to the strategy. (Kaplan & Norton, The Strategy-
Focused Organization, 2000). Kaplan provides three major steps for getting strategy
everyone´s everyday job.
1. Communication and education: Workers must understand and learn about the
strategy
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2. Developing personal and team objectives: Breaking down the strategy goals to
personal goals strength the will to execute them, especially connecting the goals
with
3. Incentive and reward systems.
2.3.4 Principle 4: “Make Strategy a Continual Process”
For most organizations, the management process is built around the budget and
operating plan. The successful balanced scorecard companies introduce a process to
manage strategy. (Kaplan & Norton, The Strategy-Focused Organization, 2000) Kaplan
refers to a “double-loop process” – one that integrates the management of tactics and
the management of strategy into a seamless and continual process. Three main steps are
described by Kaplan:
1. Link strategy to the budgeting process with STRATEX
2. Management meetings for strategy review
3. Learning and adapting the strategy.
This chapter is a first step and the bases for the execution premium.
2.3.5 Principle 5: “Mobilize Change through Executive Leadership”
The first four principles focus on the balanced scorecard tool, the needed
framework and the supporting processes. (Kaplan & Norton, The Strategy-Focused
Organization, 2000) Kaplan is very clear about the topic that there is more than tools
and processes getting to a strategy focused organization: Strategy requires change from
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every part of the organization. (Kaplan & Norton, The Strategy-Focused Organization,
2000). He mentions three major steps.
1. Mobilization
2. governance
3. Strategy management system
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3 EXPERIMENT
The Experiment chapter shows the execution of the theoretical concepts from execution
premium in a practical business case. It contains a detail description how and with
which methods and approaches the several steps are performed in the experiment. The
experiment is a real life case in the energy industry executing the setup and execution
of a new sales strategy with respect to the changes in the energy market in Germany.
The experiment was performed before the development of the ISOL-M. Therefore it
was the basis for realizing the concepts of Kaplan´s premium execution in a real world
case.
In the upcoming chapter 4 the GAP´s by doing the experiment are described and in
chapter 5 a best-practice approach filling these GAP´s is provided.
Environment for the experiment
The German energy market was government controlled till 2005. An EU novella
from 2003 brought the end of the monopolism in the energy market (energy, gas) and
therefor an extreme change for the energy market need to be done. The change from a
government controlled monopolist to a free-market company with the awareness of
customers and competitors.
With this change the need for strategic management came up very quickly. The
management of these energy companies need to set up very quickly a managerial
system for defining and executing all the core fields a free-market company needs to
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exist. Questions like: What is our vision, what is our USP, how do we earn money and
other essential question come up.
Therefore the board launches a 20 month long initiative called “strategic
excellence 12” to setup a framework for strategic realization in the sales department –
which was the driver for the overall strategic roadmap of the company.
Step 1 and 2: Develop and plan the strategy
Within the strategic management the development and the planning of the
strategy was performed. To define visions and missions top management workshops
have been done and from this point the overall strategy was development with respect
to the results of a PESTEL and SWOT analysis.
In the next process step possible strategy approaches for the sales department
are collected and formulated. In a second step a strategy map with respect to the four
perspectives of the balanced score card was developed.
In the third step the breakdown of the overall map to department maps was
performed and existing and new initiatives where defined. The last process was to
calculate the strategic budget (STRATEX) for the initiatives and evaluate them in form
of a cost-benefit analysis, which was the basis for the selection of the to-be operated
initiatives.
Step 3: Align the organization
The next step was to prepare the organization. A first approach was to segment
the sales department into three levels.
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Level 1 – Strategic Management, which is dedicated to step 1 “develop the
strategy” and step 2 “plan the strategy” from Kaplan´s system.
This level is linked to the organizational level of the CMO (Chief of Marketing
and Sales) and the new generated Office of Strategy Management (OSM).
Level 2 – Tactical Management, dedicated to step 3 to 6 in Kaplan´s system,
was linked to the mid-management level (department leaders)
Level 3 – Operational Management, dedicated to execute the initiatives was
linked to the operational units, controlled by the team leaders.
Above that every project for initiates gets a project organization with project
lead, project members and line managers dedicated to every project.
Step 4-6: Plan Operations, Execution, Monitor and Learn, Test
and Adapt
In the tactical management process the following steps of Kaplan´s system were
done:
Plan Operations
Control and learn
Test and adapt
The output of step 1 was a tactical plan in form of revenue- and budget plans
(overall, department driven), resource- and capacity plans connected to a RASIC model
for the alignment of the organization.
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For step 2 and 3 a setting of several meetings on different levels with different
tools for collecting and assessing information of the strategic initiatives (Time, Budget
and Quality) have been rollout.
Conclusion
In the experiment the first three steps were quiet a success. Strategy and strategy
maps could be performed well, the OSM has been installed and the new organizational
setup was performed. After that the projects get started and with that step, execution of
the strategy, problems appeared. The main issue was, that the interaction, the interfaces
and the integration of the strategy management level to the tactical and operational level
showed major GAP´s. These GAP´s are described in the next chapter and the solution
for closing these GAP´s are provided in chapter 5.
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4 GAP-ANALYSIS: KAPLAN´S THEORY AND PRAXIS
EXPERIMENT
The GAP-Analysis chapter will show on a researching level where the theories
out of Kaplan´s thesis have GAP´s or are not an appropriate approach to solve concrete
business case and execution problem fields.
Before getting into the detailed analysis of gaps per chapter from Kaplan´s
management system “the execution premium”, the most obvious GAP in his book is
the fact that there is no designated chapter for “execution”. Therefore step 1 and 2 are
the development and the planning of the strategy, step 3 to 6 are about how to plan the
operations (with respect to organizational issues) and how to monitor, learn and adapt
from the execution. But HOW do we execute strategic initiatives, what is an appropriate
methodology in form of processes, roles and responsibilities and tools for that part are
poorly announced. And how can the interfaces from the methods linked optimal for an
integrated system.
Step 1 and 2 - development and plan the strategy
Kaplan is very clear about the definition and formulation of vision, mission and
strategy.
In the reality the clear understanding of this three terms are not common and
very often mixed up on different levels of the organization. This leads to the problem
that everybody in the organization understands something different under these three
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terms. This circumstances make it very difficult to find a formulation which is accepted
by all needed parties in the company.
Another question that arises concerns the scope of the business: “Can a single
strategy be formulated if the complexity of the business and its related operations is
extremely heterogeneous?” For that reason the output of the phase 1 and phase 2 is
almost surely provided with a wide variety of different streams of strategy settings.
Another sticking point is the question, which method of strategic analysis should
be used. Today there are various from 5 Forces to PESTEL.
The topic of strategic formulation leads to a simple problem. What is strategy? Is it an
external view of customers and markets, or an internal view of the marketing mix (or
the extended marketing mix on 6 P) of the company. Do old strategy methods like BCG
or Ansoff work out for a solid basis for further planning or are rather complex strategy
methods needed?
The results of the experiment show that three main tasks need to be performed
within the first phase.
First: Communication Concept
A clear communication concept needs to be set up. Main scope of the concept
should be clearing the terms of mission, vision and strategy in the company’s context.
After that the content of the three topics (vision, mission, strategy) need to be clearly
formulated in a way it can be understand on every single level of the organization.
Second: strategy analysis methods
As already mentioned there is a great variety of possible methods for strategic
analysis. So there needs to be a selection of the best methods providing the optimal data
and solutions for all further steps. After performing these methods the last step should
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be the choice of one or a combination of generic strategy approaches. This helps to
concentrate on possible planning options within the defined approach.
Third: strategy formulation with respect and linking point to strategy map
The strategy formulation should be done in the mainframe of the strategic maps
as a linking point between strategy development and strategy planning to get seamless
integrated findings and an optimal basis for the next phases.
Kaplan describes that strategy planning is the overall planning of initiatives
(programs or projects) that closes the gap between the vision and the status quo.
The main issue in performing the experiment was how to prioritize differ
strategies roadmaps with respect to limit resources. For example: is closing the gap in
the field of market and product positioning and therefore the development of market-
related services more needed or is it better to contribute to the internal structures gap.
This is the balancing act between innovation and efficiency, and therefore a main
strategic decision which need to be done in step 1. But in step 1 not all relevant data is
available, especially factor costs for strategic initiatives and programs is in this phase
underdeveloped. So there is the need for a main decision: Top-Down costing with a
fixed STRATEX budget, which can be assigned to the divers initiatives or setting a
feedback loop out of phase 3 and 4 getting reliable data for a prioritization process.
Next GAP in Kaplan´s theories is how to manage the big amount of measures
that arise with breaking down the strategy map and its initiates to the organizational
structure. How are the resources allocated to the many activities and which resources
will be distributed. How can initiative programs and projects stuffed with resources that
allow an efficient way of managing it? How can I plan the projects without getting the
operational management on board?
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The same questions needs to be asked for the task of funding strategic activities.
In the experiment and real world the top-down approach of providing a budgeting pool
for strategic realization was not given. The Top Management wanted to decide on
aggregated numbers with a bottom-up approach. But a look on the process steps from
Kaplan shows that these number are in the phase 2 – plan the strategy – not available.
Button Line: the experiment has shown, that the provided methods from Kaplan
for these phase: strategy map and BSC were the optimal tools for planning the strategy.
STRATEX without any button-up tool from later coming phases was not appropriate
in the real world. There need to be a linking element between capacity planning and the
tools of the execution phase developed.
Step 3 – align the organization
The alignment of the organization in Kaplan´s system is focused on four main
topics:
Align Business Units
Align Support Units
Align Employees
Install Office of strategy management.
The problem with the mythology in the experiment was that the organization
wasn’t ready in case of its capacities, structure and culture.
The analysis of the experiment´s organization was that the implementation of
even a good strategy today is not possible, that there is no appropriate organization of
management processes (preparation of decisions, making decisions, communication of
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decisions). This is precisely the reason why the development of the strategy has also to
reflect the given organizational environment in step 1 or in the first place a change
management projects needs to be performed to develop and implement an
organizational model, which fits to the strategic visions and to the fact of operational
execution of this visions.
Second issue is that the culture of organizations is an enormous vulnerability.
Some organizations are not used to lead to an open discussion of contrary decisions and
define a shared decision. There maybe is an organizational form that is initiated in the
decisions, but ultimately, all leaders do not act according to the decision, since it has no
effects to them. Organizations must learn to make decisions under strategic conditions.
The analysis of the experiment show that the provided steps from Kaplan are
fully valid. The realization of these organizational settings need to be made visible and
understandable for the complete organization. A dedicated collaboration concept and
flanking change management projects need to be developed and realized for an optimal
output.
Step 4-6 - Plan Operations, Execution, Monitor and Learn, Test
and Adapt
After formulating the strategy and the breakdown and alignment to structure and
process organization, the individual measures are planned. But what happens, if the
operating budget, the rough planning in relation to the resources that are essential before
the alignment of the organization, were far too optimistic and more resources are
needed. In this case, there must be a feedback and monitoring strategy and optimal
tools, since strategy may need to be adjusted.
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Essential is also the question, how strategy processes with operational planning
processes can be synchronized and can be simultaneously anchored in target
agreements with employees. Every manager should ultimately from both perspectives
have an objective, which is usually but not obvious at all the case. The whole issue of
liability of strategies due to the transient nature of staff conditions of senior executives
was a big problem. How can I control that the person who has made the strategy two
years ago, is also responsible for it now, even though he already has a different role
within the company.
The main issue with the monitor and learn and test and adapt steps in Kaplan´s
system are, that the basis for monitoring, therefore for learning, testing and adaption
are information out of the “executing” phase. So the executing phase needs to work
with methodologies which are appropriate to perform these two steps. As mentioned in
the beginning of chapter 3 the main validated GAP in the system is the “not-worked-
out” section about execution and its methods. The information of this model are the
basis for monitor, learn, test and adapt.
Kaplan concentrates in these phases mostly on budgeting and meeting tools. The
experiment shows that an integrated system is needed to react on changes in the plan
and develop solid data for re-planning and adjusting the strategic decisions.
Conclusion
Taking a holistically look on the experiment and its analysis within the first two
steps a concretization and selection of the provided methods needs to be done. Step
three needs a front-up change management project and collaboration model to prepare
the organization. Step four to six does not provide necessary methods for execution like
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initiative, program and project management solutions for realizing the strategy. Overall
the experiment shows the need of an interacting and integrated model for execution.
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5 APPROACH FOR BEST-PRACTICE SOLUTION: ISOL-M
This chapter will focus on developing an integrated model for closing the GAP´s
provided in chapter 4 and is therefore the main part of this dissertation.
The main focus will be on providing the ISOL-M as a solution closing the GAP´s
coming from Kaplan´s System step “Execution” (process, initiative).
The ISOL-M includes also a solution for the three front-up phases “strategy
development”, “strategy planning” and “aligning the organization” because of two main
reasons. First to show a solution closing the discussed GAP´s in these phases, second
to show the needed output and interaction from these phases within the ISOL-M.
The chapter will first show an overview of the developed ISOL-M including
defined processes, tools and organizational settings.
In the second step all phases of the model will be described. Within these descriptions
the evaluation and selection of the best method for every phase and the construction of
an integrated realization method system with interacting interfaces will be provided.
General approach - PTO
The PTO (Processes, Tools, Organization) approach is a best-practice approach
which aggregates knowledge and proven tool-settings from a bunch of mythologies
from process management and organization management as well as from IT
management.
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The idea for PTO is that by developing and describing models for companies
three levels and the interaction between the levels always need to be considered.
Processes – A process is a sequence of interdependent and linked procedures
which, at every stage, consume one or more resources (employee time, energy,
machines, money) to convert inputs (data, material, parts, etc.) into outputs. These
outputs then serve as inputs for the next stage until a known goal or end result is
reached. (http://www.businessdictionary.com/definition/process.html, 2013) With
respect to the ISOL-M processes are described as steps to perform the methods within
the model.
Tools – A tool in the context of the ISOL-M is a piece of software, a template,
or a mixture of both with respect to a method in the ISOL-M.
Organization – The organization level describes who performs the processes or
who operates with the tools. The organizational settings are described in the
collaboration model. Organization units and organizational roles are connected to
processes.
ISOL-M – the model
The ISOL-M model landscape (Figure 26) shows the complete framework for
the ISOL-M performed under the conditions of the PTO approach and with defined
interfaces and interactions between the phases.
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Figure 26: ISOL-M model landscape
81
82
Organizational Requirements for ISOL-M
The ISOL-M model needs a special organizational set-up, which is barely
developed at the actual state-of-art company. Even though different studies have shown
that getting directors involved in strategy can enhance a company’s financial
performance and boost stock value. (Strategic Direction, 2008) Strategy execution is
often a so called night job, where managers have to fulfill their task in that area besides
their normal line work packages. (Kaplan & Norton, The Execution Premium, 2008)
Therefore the organizational setup is a major topic for a successful
implementation of the ISOL-M and that in two ways:
First the described roles must be in place before starting with the implementation
of the model. All roles must be aligned to a person. Some roles are explicit designated
for only ISOL-M processes. Above that the people must be trained on the ISOL-M
processes and tools to get the planned and wanted results with that model.
Second: The organization and its workers and managers must be ready for the
ISOL-M regarding their mindset. There must be an open culture for the structure of
ISOL-M, a culture which is totally strategy-focused, a culture which has existing
structures for process driven models, an efficient meeting culture and is open for change
taking over business unit boundaries.
It is recommendable to perform a pre-project to ensure an environment, which
is able to handle this change of working line business into strategy-focused, project
oriented work. Because converting the strategic vision and high-level goals into
implementable actions, is the big challenge of an organization change. (Pellegrinelli,
1997)
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In the following sub-chapters of chapter 5.3 all needed organizational units and
roles for the ISOL-M are defined. At the end the connection between processes, roles
and responsibilities are presented in form of a RACI.
5.3.1 Strategic Management Organization (SMOrg)
The SMOrg needs to have the following members:
Members from the Board Management – Depending on which level of
strategy realization the execution should be done one or more members from the board
need to be assigned to be part of the SMOrg. If the strategy is a company-wide strategy
the CEO needs to be part of it, if it is a strategy related to a special area (e.g. sales, HR)
the responsible board member for the area is needed.
Strategy Management Office (SMO) – The strategy Management Office is a
new unit, which is essential for the success of the ISOL-M and needs to be performed
the way Kaplan describes the setting, tasks and responsibilities. Within the SMOrg the
tasks for SMO is to ensure the processes and use of tools and to be the connector
between all organizational units within the ISOL-M.
5.3.2 Initiative and Program Organization (IPOrg)
The IPOrg is needed to manage and control all activities around initiatives and
programs. It is the linking part between project organization and the top-level
management.
The IPOrg needs to have the following members:
Initiative/Program Manager – Initiative and program managers are dedicated
to manage their programs. They don’t have any line responsibility or tasks.
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Line Managers – Line managers need to be in the IPOrg to ensure the “view of
reality” is not out of sight within the construct of strategy focusing.
Strategy Management Office (SMO) – Within the IPOrg the tasks for SMO is
to ensure the processes and use of tools and to be the connector between the top
management level and the IPOrg.
5.3.3 Project Organization (POrg)
Project Manager – Project managers are dedicated to manage their programs.
They don’t have any line responsibility or tasks.
Project Members – Project members are line members or specialist which are
needed in the context of the project to deliver sub-work packages with their special
know-how.
Project Steering Committee – The project steering committee is an
organizational tool from project management theories. It has the function of an
escalation forum for problems which cannot be solved in the project team itself and the
project manager needs to report to the committee. Normally the initiative manager, the
program manager, the project manager are members of the steering committee.
5.3.4 Strategy Management Board Organization (SMBOrg)
The SMBOrg is the organization unit, which is responsible for the SMB-
Council. Part of the SMBOrg is the complete IPOrg. With respect to strategic
movements and size of projects there could be the need of getting the SMOrg and
project managers into this organizational unit. Main organizational driver in the
SMBOrg is the SMO.
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5.3.5 Process and RACI
The RACI matrix is a common method to show high-level processes and connect
them with needed roles. RACI stands for:
R – Responsible
A – Accountable
C – Consult
I – Information
Table 9 shows a generic RACI Model for the ISOL-M.
Table 9: RACI
SMBOrg
Phase
Pro
cess G
roup
Pro
cesses w
ith T
ools
Mem
bers
from
the B
oard
SM
O
Initia
tive / P
rogra
m M
anager
Lin
e M
anager
SM
O
Pro
ject M
anager
Pro
ject M
em
ber
Mem
bers
of S
MB
Communication
ConceptA, R C I I I I I I
PESTEL A R
SWOT A R
Decicion Matrix Tool A R
Selection of generic
strategic ApproachesA,R C
Strategy Formulation A,R C
Define Targets Strategy Map A I R I
Identify MeasuresBalanced Score Card
A I R I
Action Planning Tool C C A,R I
Initiative and Planning
ToolA,R C C I
Funding STRATEX A C C R C I
3Capacity
Planning
Capacity ToolC C A,R C I
Project
Evaluation
SMB ToolA C C R
Project
Presentation &
Decision
SMB Tool
C C R A
Project Setup &
Requirements
Project ToolI I A,R C
Project Approval SMB Tool R C C A
Project ExecutionProject Tool, SMB Tool
C A R I
4
SMOrg IPOrg PorgRACI MATRIX
Strategy Dev1
2Action & Initiative
Planning
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Phase 1: Strategy Development
As Kaplan stated the main focus of this phase is to perform three main process
steps.
a) Definition of mission, values and vision
b) Strategic analysis
c) Strategic formulation
The definition of the mission, company values and vision is an activity defining
long-term values for the company. This procedure is done firstly by grounding the
company and there should be a yearly review of these three topics. With respect to
growth and several external and internal factors there may be the need of adjustment of
these topics. However, a main problem of companies is to communicate these values.
The external communication to customers and investors is mostly done by providing
the information on websites and in annual reports. The internal communication to
employees is often neglected or underdeveloped because companies use the same
channels and formulations for the internal communication as for external. But there is
the need of an extremely more detailed and deep understanding of these terms for
internal receivers. Employees need to fully understand the company values for their
daily business to act in union with these values. And they need to get a deep
understanding of the mission and vision to get on the same train as the management.
There is the absolute need of this understanding on the way to a strategy-focused
organization and to rise the chances for successful realization of the strategy.
For that reason one of the main issues in the phase of strategy development is
providing the tool communication concept.
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5.4.1 Communication Concept
Figure 27: Communication Concept Tool
The communication concept has the following goals:
a) Define the terms of mission, vision and values in a way that every level in
the company has the same understanding and state the company´s mission,
vision and values,
b) Provide the main goals for the future, the actual situation and the GAP´s
between these two conditions,
c) Provide the results out of strategic analysis and the decision for one or a mix
of generic strategic approaches,
d) Provide the results of strategy formulation on a BSC and Strategy Map basis.
5.4.2 Selection of strategy analysis methods
As already mentioned there is a great variety of possible methods for strategic
analysis. So there needs to be a selection of the best methods providing the optimal data
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and solutions for all further steps. Generally two main aspects need to be covered:
External and internal Analysis.
A review of the literature reveals that different approaches and techniques were
used for the analysis of macro environment (external analysis). (Lynch, 2009)
With respect to the processes of phase 2 the PESTEL (Table 10) for external analysis
seems to be most appropriate.
As Yüksel stated in his article PESTEL analysis mainly provides a general idea
about the macro environmental conditions and situation of a company. (Yüksel,
21.11.2012). Lynch provides the following main and sub-factors for PESTEL as shown
in below figure.
Table 10: PESTEL Tool
For the internal analysis the SWOT Tool seems to be appropriate. Helms and
Nixon review the SWOT analysis techniques and their deployment over the last decade
in the article “exploring SWOT analysis” and state that the SWOT Analysis is one of
the major tools for strategy planning. (Nixon&Helms, 2010). Even if there are critical
89
voices like “the SWOT framework, with its vagueness, oversimplified methodology
and numerous limitations (Panagiotou, 2003) is a victim of its own success. (Pickton &
Wright, 1998)” Lee and Ko suggest that the SWOT Analysis combined with the BSC
make a systematic and holistic strategic management system better. (Lee & Ko, 2000).
Table 11: SWOT Tool
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These two methods follow the track to an optimal output in form of a decision matrix
(Figure 28).
Figure 28: Decision Matrix Tool
5.4.3 Strategic formulation
The last step of the strategy development phase is the strategic formulation. This
step should provide the clear output for phase 2 and is therefore the interface between
these two phases.
The strategic formulation should be built on the results of the strategic analysis
and should be performed in a framework that is already a linking element to the strategy
maps and BSC in phase 2. The figure below shows the tool which provides optimal
interface connection to mentioned tools (strategy map and BSC).
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Figure 29: strategy formulation tool
5.4.4 Organizational responsibility
All processes and tools within this first phase need to be performed by the
organizational unit of SMOrg, because the results of these steps are trendsetting and
visionary for the whole company and the responsibility for that is definitely on top-
management level.
The communication is a top-down communication and there is the need for
quality gates to ensure, that everybody understood definitions and content.
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Phase 2: Strategy Planning
In the strategic planning phase two main tasks need to be performed. First:
Transferring the strategic goal definition out of phase 1 into realization programs and
initiatives, second, clear the funding of these initiatives by calculating STRATEX. The
used methodology follows mainly the theories from Kaplan, especially provided in the
balanced score card.
5.5.1 The way to strategic initiatives and programs
Basis for setting up the strategic initiatives is the strategy formulation from
phase 1. As this step was already performed within the matrix of BSC and strategy
maps it is obvious that the use of these two tools is appropriate for phase 2 strategic
planning.
The first step is to transfer the strategic goals into a strategy map which is build
up on the four factors of the BSC (Figure 30).
Figure 30: strategy map tool
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In the next step the strategic goals from the strategy map are transmitted to a
Balanced Score Card. Within this tool (Table 12) the measurement for the goal needs
to be defined as well as the target. In the last step the BSC Index needs to be calculated.
For that there is the need of aggregating all planned goals and their targets to a countable
BSC Field goal. What is the expected financial output by realizing the goals? This
process can sometimes be really tricky, especially if the goals are driven by soft-facts.
Kaplan discovers that the data are not available for at least 20% of the measures on the
scorecard. (Kaplan & Norton, The Balanced Scorecard, 1996). For the ISOL-M there
is the absolute need of getting this data and transfer them into “only-Euro”-goals. The
last step is to define the BSC Index. This index is an indicator how much value each
single goal contributes to the BSC Field goal. The BSC index is a simple percentage
indicator. 100% means the goal takes fully care of the overall BSC Field goal.
BSC Field Strategic goal Measure Target form
Target
value (from
actual
value)
BSC field goal BSC Index
Increase of the margin per customer gross margin per cust. Increase2%
50%
Reduction of the Cost-to-Serve Cost-to-serve Decrease 5% 20%
Reduction of the production costs procurement costs Decrease 5% 20%
Reduction of the total costs Total costs Decrease 2% 10%
Price increase till the permitted limit gross margin per cust. Increase 10% 30%
Maintaining the recent service
quality
SLA Terms - Process
CostsDecrease 5% 30%
Product developmentNumber new products-
new revenueIncrease 2% 30%
Strengthening the brand through an
image campaign
Number of campaigns-
new revenueIncrease 1% 10%
Reactive ChurnmanagementChurnrate - costs for
new customersDecrease 10% 60%
Reduction of product development
costs
Developed Products -
costsDecrease 5% 40%
Securing the internal know-howdocumentation -
reusability - costsDecrease
10%60%
Integration of the new management
team
Quality of processes -
costsDecrease 5% 20%
20%
BALANCED SCORE CARD
Increase 2%
5.000.000,00 €
1.000.000,00 €
1.000.000,00 €
50.000,00 €
Revenue and
costs
Market,
customer and
products
Processes and
structure
Staff and cultureImprovement of the customer
information
Know How Index - new
asset revenue
Table 12: BSC Tool
The next process is to develop actions in form of an action planning tool (Table
13), which helps the company to achieve the defined goals. These actions should be
developed on a single goal basis. For every action an action index must be calculated.
This action index is an indicator how much value the action brings to the goal. Probably
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there is the need for more than one action to fulfil a goal so a set of actions is needed.
The action index is a simple percentage indicator. 100% means the action takes fully
care of the target.
BSC Field Strategic goal Measure Target form
Target
value (from
actual
value)
Action Action Index
Increase of the margin per customer gross margin per cust. Increase2% Action 1 100%
Reduction of the Cost-to-Serve Cost-to-serve Decrease 5% Action 2 100%
Reduction of the production costs procurement costs Decrease 5% Action 3 100%
Reduction of the total costs Total costs Decrease 2% Action 4 100%
Price increase till the permitted limit gross margin per cust. Increase 10%Action 5 100%
Maintaining the recent service
quality
SLA Terms - Process
CostsDecrease 5%
Action 6 100%
Product developmentNumber new products-
new revenueIncrease 2%
Action 7 100%
Strengthening the brand through an
image campaign
Number of campaigns-
new revenueIncrease 1%
Action 8 100%
Reactive ChurnmanagementChurnrate - costs for
new customersDecrease 10%
Action 9 100%
Reduction of product development
costs
Developed Products -
costsDecrease 5%
Action 10 100%
Securing the internal know-howdocumentation -
reusability - costsDecrease
10% Action 11 100%
Action 12 60%
Action 13 40%
Integration of the new management
team
Quality of processes -
costsDecrease 5%
Action 14 100%
ACTION PLANNINGBALANCED SCORE CARD
Increase 2%
Revenue and
costs
Market,
customer and
products
Processes and
structure
Staff and cultureImprovement of the customer
information
Know How Index - new
asset revenue
Table 13: Action Planning Tool
The last step is to merge several actions into initiatives or programs. For an
optimal merge a merging matrix with possible merging values needs to be developed.
These values can be chosen differently from company to company. Possible values are
shown in Table 14. In the below case two initiatives (optimization and innovation) have
been defined. Under each initiative two programs (increase margin, decrease costs)
have been set up. Under these programs several actions are placed.
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Table 14: Initiative and Program Planning Tool
The next upcoming processes are
a) Clear funding of the initiatives. This step will be performed with STRATEX
(next chapter)
b) Transfer the actions into realization projects. This step will be performed in
phase 4, step 1: project idea evaluation.
5.5.2 Integrated STRATEX tool
The funding of the strategic plans and actions will be performed within the
STRATEX tool.
As already stated in the GAP Analysis, STRATEX cannot be performed without
any funded data. For that reason the setup of the capacity tool (phase 3) and the first
step of the execution phase “project idea evaluation” need to be done first. These two
BSC Field ActionAction
Index
form
(initiative)
financial impact
(program)
Business Unit
(operative
responsibility)
Action 1 100% Optimization increase margin direct sales
Action 2 100% Optimization decrease costs sales support
Action 3 100% Optimization decrease costs procurement
Action 4 100% Optimization decrease costs sales controlling
Action 5 100% Optimization decrease costs direct sales
Action 6 100% Optimization decrease costs sales support
Action 7 100% Innovation increase margin product management
Action 8 100% Innovation decrease costs sales support
Action 9 100% Optimization decrease costs product management
Action 10 100% Optimization decrease costs sales support
Action 11 100% Optimization decrease costs sales support
Action 12 60% Innovation increase margin sales IT
Action 13 40% Innovation increase margin sales IT
Action 14 100% Optimization decrease costs sales management
ACTION PLANNING INITIATIVE / PROGRAM PLANNING
Staff and culture
Revenue and costs
Market, customer
and products
BSC
Processes and
structure
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tools deliver reasonable data for calculating STRATEX. The approach that a company
sets up a strategic budget without that data, but for example a ratio of sales revenue or
overall revenue seams very seldom.
Pretending the capacity tool and the project idea evaluation are already
performed the STRATEX calculation can be done as shown in Table 15.
Table 15: STRATEX Tool
As Baldwin and Clark stated many companies do not link their investments to
long-term strategic priorities. (Baldwin & Clark, 1994)
But the company needs to fund the TOTAL STRATEX amount in their overall
budget planning. The advantage of calculating with STRATEX is, that strategic
expenses can be controlled under the same condition as operational expenses and
revenues and all controlling KPI´s like cost-effectiveness on strategies, ROI on
strategies can be performed.
Initiative costs per init programcosts per
programprojects
costs per
projectAction
decrease costs 50.000,00 € project 1 50.000,00 € Action 8
Action 7
Action 12
project 3 3.750,00 € Action 13
Action 2
Action 3
Action 4
Action 5
Action 6
Action 9
Action 10
Action 11
Action 14
increase margin 2.250.000,00 € project 7 2.250.000,00 € Action 1
TOTAL 3.540.960,39 €
STRATEX
90.960,39 €
3.450.000,00 €
40.960,39 €
1.200.000,00 €
Innovation
Optimazation
increase margin
decrease costs
37.210,39 €
250.000,00 €
100.000,00 €
850.000,00 €
project 2
project 4
project 5
project 6
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5.5.3 Organizational responsibility
All processes and tools within this second phase need to be performed by the
organizational unit of IPOrg. As this phase is the connection between top level
management processes and middle management processes the IPOrg has a mixed
setting of managers (see chapter IPOrg). The SMO is responsible for managing and
controlling the transformation of the results of phase 1 to phase 2. And they need to
specify the target measurements and index with the top management, for defined
strategic goals from phase 1. The initiative and program manager are responsible for
performing the initiative and program tool and the line managers are on board for a
realistic view on possible actions and their outputs with respect of calculating
STRATEX.
Phase 3: Capacity Setup
Resources are a limiting factor for companies to execute their strategies. In the
strategy realization business the focus is on human resources.
So after developing and planning the strategy in phase 1 and phase 2, the next
step is to setup a framework which delivers the following information (Table 16):
a) Resource pool of possible resources (internal, external)
b) Availability of resources
c) Skills of the resource / appropriate resource alignment
d) Costs of the resource
Above that the capacity tool keeps resource master data like personal data per
person, holiday planning, substitutes, alignment to organizational units, and alignment
to role model and position.
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The capacity tool has a direct influence and interface with the tools of
STRATEX and the SMB Tool. It delivers costs to STRATEX and possible
organizational setups with respect to appropriate skills and availability for the SMB
Tool for the projects.
99
Name Org. Unit Substitute
ISOL-M
skills Line role Position contract Costs per Year
Costs per
day
booked on
line activities
booked on
ISOL-M
activities utilisation
Person 1 Unit 1 Person 2
program
manager none internal 100.000,00 € 454,55 €
Person 2 Unit 2 Person 3
initiative
manager none internal 150.000,00 € 681,82 €
Person 3 Unit 3 Person 4
OSM
manager none internal 90.000,00 € 409,09 €
Person 4 Unit 4 Person 5
project
manager none external - 1.000,00 €
Person 5 Unit 5 Person 6
project
member
Unit
member
sales
admin internal 60.000,00 € 272,73 €
Person 6 Unit 6 Person 7
project
member Unit lead
sales
manager internal 75.000,00 € 340,91 €
Person 7 Unit 7 Person 8
project
member
Unit
member
support
admin internal 60.000,00 € 272,73 €
Person 8 Unit 8 Person 9
project
member
Unit
member
support
admin internal 60.000,00 € 272,73 €
Person 9 Unit 9 Person 10
project
member
Unit
member
support
admin internal 60.000,00 € 272,73 €
Person 10 Unit 10 Person 11
project
member none extern - 800,00 €
monthly day by
day calender
with data in %
of line activities
monthly day
by day
calender with
data in % of
ISOL-M
activities.
Data input
from SMB
Tool (project
idea
evaluation for
planned
book ing,
project
execution for
as-is
book ings
monthly day
by day
calender with
calculated
utilisation
rate
(possible
availability
minus
booked
activities)
CAPACITY TOOL
Table 16: Capacity Tool
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100
Phase 4: Execution
Phase 4 is dedicated to the model of execution. The model includes the following
five process steps (see Figure 31).
Figure 31: Execution Overview
In the following chapters a detailed description of processes, tools and
organizational responsibility for every process step is provided with respect of the use
of results from front-up phases 1-3 and interfaces between the phases. Two main tools
are developed and needed for this phase. First the SMB Tool which is responsible to
evaluate, plan and control all project activities with the focus on multi-project
management. Second a project tool is needed, which helps to plan and execute every
single project with a generic approach.
5.7.1 Step 1: Project Idea Evaluation
In line with the suggestion that prior to commencing a project, the need for high-
level requirements may be documented as part of a larger organization initiative
(Project Management Institute, 2013), the organizational initiative has been concluded
by the BSC. Therefore, the next step is to evaluate project ideas with respect to the
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defined strategy actions and in the framework of the initiative and program planning
results.
Starting point for the project idea evaluation is the initiative overview from the
initiative planning overview (Table 17: SMB Tool Evaluation Start).
Action Action Indexform
(initiative)
financial
impact
(program)
Business Unit
(operative
responsibility)
Initiative program projects
Action 8 100% Innovation decrease costs sales support decrease costs project 1
Action 7 100% Innovation increase margin product management
Action 12 60% Innovation increase margin sales IT
Action 13 40% Innovation increase margin sales IT project 3
Action 2 100% Optimazation decrease costs sales support
Action 3 100% Optimazation decrease costs procurement
Action 4 100% Optimazation decrease costs sales controlling
Action 5 100% Optimazation decrease costs direct sales
Action 6 100% Optimazation decrease costs sales support
Action 9 100% Optimazation decrease costs product management
Action 10 100% Optimazation decrease costs sales support
Action 11 100% Optimazation decrease costs sales support
Action 14 100% Optimazation decrease costs sales management
Action 1 100% Optimazation increase margin direct sales increase margin project 7
Optimazationdecrease costs
project 4
project 5
project 6
ACTION PLANNING INITIATIVE / PROGRAM PLANNING / PROJECT
Innovationincrease margin
project 2
Table 17: SMB Tool Evaluation Start
The initiative or program manager sets up a new project in the SMB Tool. The
first part of the SMB Tool is the evaluation sheet. In this sheet the following information
are transferred:
Project name
Connection to program and initiative
Form, financial impact and business unit
Transfer actions to project goal topics
Actions details
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Figure 32: SMB Tool - project idea evaluation
In the next step the program manager defines the dedicated project manager and
performs the project idea evaluation processes.
First project ideas need to be generated with the focus of operational realization
for scoring the project goals (actions). In the second step from this ideas the project
scope needs to be described. Sometimes it is very useful to define the non-scope of the
*Effort approach for realization of high level requirements
Person Days Utilization eff. Days Costs/day Total
Person 4 42 30% 12,6 1.000,00 € 12.642,86 € 37.210,39 €
Person 1 42 20% 8,4 454,55 € 3.831,17 €
Person 2 42 5% 2,1 681,82 € 1.436,69 €
Person 5 42 50% 21,1 272,73 € 5.746,75 €
Person 6 42 30% 12,6 340,91 € 4.310,06 €
Person 10 42 20% 8,4 800,00 € 6.742,86 €
ex. Supplier - 100% 2.500,00 €
Project Team
Person 5
Project Team
Person 6
Project Team
Person 10
Total Costs
Project Costs*
Project Ideas Project Scope Project Delivery Objects
Project Timing
Planned Start Date Planned End Date Time Restrictions
01.01.2014 01.03.2014 Given Start or End Dates by external
restrictions
Project Organization
Project manager Program Manager Initiative Manager
Project Name Initiative Program
Project 2 Innovation increase margin
product management
Action 12 sales IT
Project Goals Action Indicator Business Units
Form Financial Impact
Innovation
100Action 7
increase margin
Person 4 Person 1 Person 2
Initiative / Program / Project
Project Idea
Project Environment Project Restrictions
Description of the environment (market,
customers, IT, services, organization)
Description of restrictions to the project
High Level Requirements
Definition of High Level Requirements in form
of business concepts. Basis for capacity and
cost approach
Ideas for Realization dedicated to action 7
Ideas for Realization dedicated to action 12
Defined Scope: What are the needed
changes, new developments to realize the
ideas?
What is the wanted output in form of new
systems, processes, etc. with respect to the
project scope?
60
103
project. With the project scope the concrete project delivery objects can be setup. The
first draft of the project scope however, is not fixed, but is defined and described with
great specificity as more information about the project is known. (Project Management
Institute, 2013) In the last step of the project idea phase the project environment and
possible restrictions need to be defined, since changes to project objectives affect
project efficiency and success (Project Management Institute, 2013).
After that step a high level requirement document in form of a business concept
needs to be performed. This document is the basis for the further step of effort
approaching.
The next step is to define the project timing and the project organization. The
results of these two definitions are the basis for the calculation of the project costs. The
complete process is shown in the process chart (Figure 33).
The responsibility for the complete process is in the POrg, especially the project
manager.
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Project Idea Evaluation
IM
PMe = Project Member
SMB = strategy Management Board
PM = Project Manager
PRM = Program Manager
= Initiative Manager
Legend:
LM = Line Manager
SMO = strategy management Office
Interface to other Process
Tool
Start/EndPoint
Process
Information
Organization
Init iative planning finished
Transfer initiative Data to SMB Tool
Define project manager
Define project idea parameters
Idea, Scope, delivery objects, environment, restristrictions
Develop High Level
Requirements
Define project Timing
Define project organization
Perform effort approach based
on HLR
Calculate project costs
Project Decision
Business Concept
Start, end, restrictions
Evaluation based on needed sk ills
Days, utilization
SMB
SMB
SMB
SMB
SMB
Capacity Tool
SMB
PRM
PRM
PM
PM
PMe
PM
PM
PM
PMe
Figure 33: Process Project Idea evaluation
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5.7.2 Step 2: Project Presentation and Decision
The project presentation and decision step is probably the most important step
of the execution phase. In this phase the project ideas were presented by the initiative
or program leaders within the SMB Council and the decision will be made, which
project will be performed in the future. Before the presentation the SMO is preparing
the SMB Tool – project decision. This tool enables the Council to decide on an analytic
basis and with the absolute scope to strategic goals. The decision step is the first of two
processes in the SMB Council. The second is the project approval presented in chapter
5.7.4.
5.7.2.1 Presentation
The presentation of projects is based on the project evaluation sheet. All
information and facts from the sheet are transformed into a slideshow template and
presented to the SMB Council.
5.7.2.2 Decision
The decision process is a multi-step approach split into two main areas: Decision
preparation performed by the SMO and decision making performed by the SMBOrg.
Generally there are three main factors to consider for the decision:
1) Financial decision aspects as goal value, costs and benefits
2) Resource capacity
3) Time
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Preparation: Calculate project Goals, Costs and Benefit
The first step is to translate the action goals into project goals by calculation.
The next step is to get all project costs information from the project evaluation sheets
and last, calculate the project benefit, the strategic benefit, the total project goal and the
total project costs as shown in the figure below.
Table 18: SMB Tool Project Decision - Project Benefit Calculation
Action Action Goal Projects Project Goal Project Costs
Project Benefit
(Total = strategic
benefit)
Action 8 100.000,00 € Project 1 100.000,00 € 50.000,00 € 50.000,00 €
Action 7 300.000,00 €
Action 12 6.000,00 €
Action 13 4.000,00 € Project 3 4.000,00 € 3.750,00 € 250,00 €
Action 2 1.000.000,00 €
Action 3 1.000.000,00 €
Action 4 500.000,00 €
Action 5 300.000,00 €
Action 6 300.000,00 €
Action 9 600.000,00 €
Action 10 400.000,00 €
Action 11 30.000,00 €
Action 14 10.000,00 €
Action 1 2.500.000,00 € Project 7 2.500.000,00 € 2.250.000,00 € 250.000,00 €
Total 7.050.000,00 € Total 7.050.000,00 € 3.540.960,39 € 3.509.039,61 €
Project 2
Project 4
Project 5
Project 6
306.000,00 €
2.000.000,00 €
1.100.000,00 €
1.040.000,00 €
37.210,39 €
250.000,00 €
100.000,00 €
Strategic Actions Projects Goal/Costs
850.000,00 €
268.789,61 €
1.750.000,00 €
1.000.000,00 €
190.000,00 €
107
Figure 34: SMB Tool Project Decision - Project Benefit Graph
Preparation: Calculate Project Contribution
The next step is to calculate the project contribution in form of
a) Project goal contribution to total strategy goal
Ratio of single project goal to overall project goal (strategic goal)
b) Project benefit contribution to total strategic benefit.
Ratio of single project benefit to strategic benefit
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Projects Project Goal Project Costs Project Benefit (Total
= strategic benefit)
Project Goal
Contribution to
Total strategy
Goal
Project
Benefit
Contribution
to Total
strategic
benefit
Project 1 100.000,00 € 50.000,00 € 50.000,00 € 1% 1%
Project 2 306.000,00 € 37.210,39 € 268.789,61 € 4% 8%
Project 3 4.000,00 € 3.750,00 € 250,00 € 0% 0%
Project 4 2.000.000,00 € 250.000,00 € 1.750.000,00 € 28% 50%
Project 5 1.100.000,00 € 100.000,00 € 1.000.000,00 € 16% 28%
Project 6 1.040.000,00 € 850.000,00 € 190.000,00 € 15% 5%
Project 7 2.500.000,00 € 2.250.000,00 € 250.000,00 € 35% 7%
Total 7.050.000,00 € 3.540.960,39 € 3.509.039,61 €
Table 19: SMB Tool Project Decision - Project Contribution Calculation
Preparation: Ranking of projects
This step has the following three sub-steps:
1) Rank the projects by the factors project goal, project benefit, project goal
contribution, project benefit contribution.
2) Define a rating factor for the four categories
3) Calculate the total ranking (Lowest Value = best ranked)
109
Table 20: SMB Tool Project Decision - Project Ranking - Calculation
Figure 35: SMB Tool Project Decision - Project Ranking – Graph
ProjectsProject
Goal
Project
Benefit
Projekt Goal
Contribution
Projekt Benefit
Contribution
Project
Goal
Project
Benefit
Projekt Goal
Contribution
Projekt
Benefit
Contribution
Rating with
Ranking
Project 1 6 6 6 6 0,5 0,5 1 6 6,00
0,5 0,5 1 6
0,5 0,5 1 6
Project 3 7 7 7 7 0,5 0,5 1 6 7,00
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
0,5 0,5 1 6
Project 7 1 4 1 4 0,5 0,5 1 6 3,44
5
2
3
4
Project 2
Project 4
Project 5
Project 6
2 3 2
5 4 5
3 5 3
1 2 1
3,38
1,19
2,19
4,81
6,00
3,38
7,001,19
2,19
4,81
3,44
Project RankingLowest Value = best value
Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7
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Preparation: Calculate Project Time
The calculation of the project time is based on the project idea evaluation sheet
start and end date and if necessary on restriction regarding the two times (e.g. needed
end date because of environmental facts like exhibition dates). The days are calculated
with respect of weekends and public holidays.
Table 21: SMB Tool Project Decision - Project Time Calculation
Figure 36: SMB Tool Project Decision - Project Time Graph
Projects Start Date End Date Days
Project 1 01.06.2014 01.12.2014 131
Project 3 01.06.2014 01.12.2014 131
Project 7 01.01.2014 01.01.2015 261
Project 2
Project 4
Project 5
Project 6
01.01.2014
01.01.2014
01.03.2014
01.12.2014
01.06.2014
01.12.2014
42
239
108
239
01.01.2014
01.01.2014
131
42
131
239
108
239261
Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7
Project Runtime
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Preparation: Calculate Resource Utilization
The basis for the calculation of the resources and their utilization are the project
evaluation sheets. The planned resources based on the business concept and their
project specific utilization are connected to the data from the capacity tool where line
activity utilization is stored to get an overview of the overall utilization per person as
shown in the table and figure below.
Table 22: SMB Tool Project Decision - Project Resource Utilization Calculation
Figure 37: SMB Tool Project Decision - Project Resource Utilization Calculation
Problem with this first approach is, that the total utilization is without respect to
the project timelines. For that reason a project-person based monthly resource
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utilization calculation needs to be done as shown in the tables below. The project time
calculation is the basis for the monthly calculation.
Project Activity Index per Month
Month Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7
1 1 1 1 1 1
2 1 1 1 1 1
3 1 1 1 1
4 1 1 1 1
5 1 1 1 1
6 1 1 1 1 1
7 1 1 1 1 1
8 1 1 1 1 1
9 1 1 1 1 1
10 1 1 1 1 1
11 1 1 1 1 1
12 1
Table 23: SMB Tool Project Decision - Project Activity Index per Month
Person 2 Person Activity Index
M Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Total P Total Line Total
1 0% 5% 0% 25% 20% 25% 20% 95% 0% 95%
2 0% 5% 0% 25% 20% 25% 20% 95% 0% 95%
3 0% 0% 0% 25% 20% 25% 20% 90% 0% 90%
4 0% 0% 0% 25% 20% 25% 20% 90% 0% 90%
5 0% 0% 0% 25% 20% 25% 20% 90% 0% 90%
6 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
7 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
8 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
9 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
10 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
11 5% 0% 10% 25% 0% 25% 20% 85% 0% 85%
12 0% 0% 0% 0% 0% 0% 20% 20% 0% 20%
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Person 3 Person Activity Index
Month Project 1 Project 2 Project 3 Project 4 Project 5 Project 6 Project 7 Total P Total Line Total
1 0% 10% 0% 10% 60% 10% 25% 115% 0% 115%
2 0% 10% 0% 10% 60% 10% 25% 115% 0% 115%
3 0% 0% 0% 10% 60% 10% 25% 105% 0% 105%
4 0% 0% 0% 10% 60% 10% 25% 105% 0% 105%
5 0% 0% 0% 10% 60% 10% 25% 105% 0% 105%
6 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
7 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
8 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
9 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
10 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
11 25% 0% 10% 10% 0% 10% 25% 80% 0% 80%
12 0% 0% 0% 0% 0% 0% 25% 25% 0% 25%
Table 24: SMB Tool Project Decision - Person Activity Index
The calculation from Table 22 shows a value for person 2 of 110% and for
person 3 a value of 150% of utilization.
With the deeper look at the distribution over the months, person 2 has no
excessive value and person 3 only in the first 5 month.
Summarized these 5 steps need to be done for every project based on the
evaluation sheets for the preparation of the decision in the SMB Council:
1) Calculate project goals, costs and benefits
2) Calculate project contribution to strategic goals
3) Rank the project by financial aspects
4) Calculate project time
5) Calculate resource utilization
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Decision Making: Decision Process
With this preparation the SMB Council can be performed. The lead of the SMB
Council is with the SMO. After the presentation of the project as described, the SMO
presents the preparation results and helps the board with the following decision process
to make the decision.
As already stated the three main decision factors are:
1) Financial Decision Aspects as Goal value, costs and benefits
2) Resource capacity
3) Time
Based on this and the information from the preparation phase the following
decision process can be set.
Project Benefit
Contribution to
Total Strategy
Benefit > 5%
Project Benefit
Contribution to
Total Strategy
Benefit < 5%
Capacity
> 100%
Capacity
< 100%
Do not shift
free resources
Shift free
resources to
other projects
Evaluate Time
(Schedules and
Constraints)
Add resources
Do not add
resources
Implement
Projects?
Do not
implement
project
No constraints
given
Constraints
given
Implement Project
Add external
resources
Add internal
resources
Figure 38: Project decision - decision process
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Decision Factor: Financial Values
The first factor for the decision is the financial value of the project and therefor
a decision framework needs to be defined like for example all projects with a project
benefit contribution lower than 5% will not be performed. Many companies define this
value based on the internal corporate interest value. Other companies define the
framework with respect to other calculated values. However this framework is set, if
there are any projects which can be eliminated by this step, all preparation calculation
steps need to be redone. The SMB Tool provides an easy and on demand solution for
that recalculation in real-time in the SMB Council.
Decision Factor: Resource capacity & Project timelines
Next step is to check if the left over projects generate any resource
overbookings. If not every project can be delivered to the next ISOL-M step. If there
are any overbookings the following simulations can be performed within the tool:
a) Is there the possibility of adding resources (e.g. external) to the projects? If
yes, recalculate the financial aspects of the project. If no:
b) Are we able to shift resources from other projects? A shifting approach could
be the ranking values. Rank resources from lower ranked project to higher
ranked projects. If yes, recalculate the financial aspects of the project and
don’t approve lower ranked projects, if not:
c) Can we extend or change the time schedules of the projects to eliminate the
resource overbookings with respect to possible time restrictions on projects?
If yes, recalculate financial aspects and resource utilization. If not don’t
approve projects.
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5.7.3 Step 3: Project Requirements
The requirements for a project with respect to ITPM regulations are documented
in three main documents shown in the below figure.
Figure 39: project requirements
The business concept is the first step in the requirement approach. It contains
the business objectives, processes and requirements for the project for the realization
of the strategic goals within the project. It is the basis for the first cost and resource
effort approach for the project idea evaluation and the basis for the project decision.
The system proposal defines the functional and non-functional requirements for
the project. It is the main focus of the step 3: project requirements. It is a detailed view
and documentation of the requirements from the business concept and the basis for the
final cost and effort approach. The results of this approach are transferred to the SMB
decision tool and on that basis the final approval of the project will be performed in the
SMB Council in the step project approval.
Responsibility for the management of the development of these documents and
the management of the described processes is dedicated to the project manager.
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5.7.4 Step 4: Project Approval
The step 4 project approval is the second process of the SMB Council. After the
project decision the detailed requirements of the project are developed within the
system proposal.
The concretion of the assumptions of the business concept normally conduct to
changes in form of
Needed resources
Changes in the timeline
Changes in the project goal (strategic revenue the project can perform in the
future).
All these changes need to be communicated from the project leader who is
responsible for the project requirement phase to the SMO. The SMO prepares the
second part of the SMB Council the same way they do it within the project decision
step with one additional step: calculate the GAP´s between status “project decision”
and “project approval” for an overview how the information from the requirement
phase changes the decision factors.
After that the same procedure in the SMB Council takes place as with project
decision.
5.7.5 Step 5: Project Execution
The design of the project execution step is based on GPM / ITPM Standards.
Many companies have developed their own model for project management and project
execution based on these standards. The main focus of this step is to show the defined
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best-practice approaches and interlink them with the ISOL-M dedicated to Kaplan´s
phases test, adapt and learn.
5.7.5.1 Step 5.1.: Setup & Planning
The main focus of the project setup is to get a stabile fundament interconnected
with the ISOL-M for the upcoming project. All processes within this step are performed
with the project tool and the organizational responsibility is in the POrg, especially
driven by the project manager, and with the project tool.
The first step of the project setup is the definition of the project phases and its
delivery objects. As below figure shows the generic concept provides eight project
phases with their delivery objects.
Figure 40: Project Setup
119
Project Initialization
The project initialization step has two main delivery objects. First the project
brief and second the project kick-off.
The project brief is an advancement of the project idea evaluation sheet. It
provided all needed information about the project and its environment. The
development of the project brief is within the responsibility of the project manager and
needs to be approved by the project steering board. Typical content of the project brief
should be:
Project background
Objectives
Requirements
Scope
Approach
Constraints and Assumptions and Risks
Alternative solutions
Profitability / project justification
Costs, benefits (quality, quantity):
Project organization
The second delivery object is the project kickoff. The Kickoff is a meeting of all
project member with the project manager to start the project. The main focus of the
kickoff meeting are:
Presentation of the project brief
Presentation of the project organization
120
Presentation of the project processes (Phase model, project collaboration
model)
Presentation of project tools
o List of open issues
o Project status
o Risk register
o Project plan
Presentation of milestone plan (First timing approach for the project)
Demand evaluation and approval
The demand evaluation and approval step has a main goal: the development of
the system design. The system design describes the solution for the requirements
coming from the business concept and system proposal.
Figure 41: Demand evaluation and approval
121
Planning and coordination
The planning step is also in the responsibility of the project manager. Input for
this phase are the approved costs, resources and timelines from the project approval
phase. Within this restrictions the planning of the project in form of a project plan,
connected resource plan and cost plan needs to be performed. There are several standard
tools (e.G. Microsoft Project) for technical support of these processes. An example is
provided in the below figure.
122
Figure 42: example generic project plan
122
123
The coordination and control step is needed for the complete phase of project
execution (planning, build, test, train, rollout and transfer into line). Main focus of the
coordination and control step is to manage the project with respect to the three
dimensions of a project: quality, time and costs. The project tool provides a template
for that issue: the status report. The status report (Figure 43) has two main functions.
First to coordinate and control the activities (work packages, sub-work
packages) within the project. Second to provide the needed information for the SMB
tool.
Figure 43: status report
The SMBOrg controls all initiatives, programs and projects in the SMB-Council.
There need to be a standardized communication line between the status report of a
project and the SMB Tool by importing the needed information:
Status of the project by status light per project dimension
Changes to costs, quality of timeline
124
This interconnection between operations (project) and strategy (SMBOrg)
provides the possibility to manage strategic projects with full control. Within the SMB
Council all project status are reported to the SMB Tool (control) and decisions about
possible needed changes are done based on the SMB decision tool by recalculating the
decision matrix. After that possible impacts to STRATEX and the capacity resource
tool are automatically transmitted.
125
Table 25: SMB Tool Control
Projects Value/RatioCosts per
project
Quality status
Quality trend
Quality history
Time status
Time trend
Time history
Costs status
Costs trend
Costs history
Overall Quality Time Costs Quality Time Costs Decision Result
Project 1 100.000,00 € 50.000,00 € on track 60% 40% 50% none none none yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 2 306.000,00 € 37.210,39 € escalation time 60% 20% 50% noneextend 3
weeksnone yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 3 4.000,00 € 3.750,00 € escalation costs 60% 40% 80% none none
25000 Euro
external
supplier
yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 4 2.000.000,00 € 250.000,00 € on track 60% 40% 50% none none none yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 5 1.100.000,00 € 100.000,00 € on track 60% 40% 50% none none none yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 6 1.040.000,00 € 850.000,00 € on track 60% 40% 50% none none none yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project 7 2.500.000,00 € 2.250.000,00 € on track 60% 40% 50% none none none yes/no
if yes - change
STRATEX
and/or
ressource
capacity
planning
Project Status Progress Change needed SMB Approval
125
126
5.7.5.2 Step 5.2.: Build
Within the Build step the project team (often with external suppliers) build the
defined solution based on the requirements from the system proposal and within the
solution approach presented in the system design. The project members deliver actual
status regarding quality, costs and time in form of the progress status to the project
manager. A standardized tool within the project tool helps to handle this communication
and control topic in an efficient way.
Workpacka
ge
Budget
planned
(in PD)
Budget
spent
(in PD)
Budget
spent
in %
Progress of
work in %Included Tasks Responsibly Duration Start End
WP 4 Build 151,0 0,0 0% 0% Build Workpackages 184 Tage Mit 17.04.13 Mon 30.12.13
Workpackage 1 Person 1 0 Tage Fre 30.08.13 Fre 30.08.13
Workpackage 2 Person 1 25 Tage Mit 25.09.13 Die 29.10.13
Workpackage 3 Person 2 10 Tage Die 17.12.13 Mon 30.12.13
Workpackage 4 Person 2 92 Tage Don 16.05.13 Fre 20.09.13
Workpackage 5 Person 2 14 Tage Die 18.06.13 Fre 05.07.13
Workpackage 6 Person 2 15 Tage Mon 26.08.13Mon 16.09.13
Workpackage 7 Person 2 10 Tage Mit 28.08.13 Die 10.09.13
Workpackage 8 Person 2 4 Tage Mit 11.09.13 Mon 16.09.13
Workpackage 9 Person 2 5 Tage Mit 28.08.13 Die 03.09.13
Workpackage 10 Person 2 49 Tage Mon 16.09.13 Fre 22.11.13
Workpackage 11 Person 2 49 Tage Die 17.09.13 Fre 22.11.13
Workpackage 12 Person 2 49 Tage Die 17.09.13 Fre 22.11.13
September October
Table 26: Project Build Tracker
5.7.5.3 Step 5.3.: Test
The test step has the main focus to test the results of the build phase for the
implementation of the designed system. The tool of the test step is the generic test
concept which describes all relevant settings regarding test organization, test processes
and test tools.
The main sub-steps within the testing are presented in below chapters.
127
Definition of test-levels
Test Level Objectives Test Artefacts
Developer test
- Component
Test
- Component
Integration
Test
Functional correctness of components.
Components interact as specified
IT concept
(System proposal)
IT concept
Interface agreements
System Test
- System Test
- System
Integration
Test
Correct implementation of business
requirements (CRs)
Functional and non-functional
requirements are realized correctly
System Proposal
Business
Requirements
Use Cases
Regression test Retest of critical test cases or failed test
cases which have yielded a defect and are
retested
System
documentation
Business
Requirements
Security test Security of the application Gateways, Connectivity
Infrastructure
Browser Test
Usability and
compatibility of browsers (e.g. Firefox)
Business
scenarios for all committed
browser versions
Load / Performance
Test
Test for performance and stability under
load
Reverence values from
production
UAT System and department-comprehensive
correctness
System Proposal
Business
Requirements
Use Cases
Table 27: Test Levels
128
Definition of test phases
Start
Test Preparation
System Test
UAT
End
Figure 44: Test Phases
129
Definition of test roles and responsibilities
Role Task
Defect
Manager /
Defect SPOC
Manage, monitor and coordinate defect life-cycle.
Moderation of defect meetings
First instance in case of
escalations
Coordinate patching / negotiate patch times
Coordinate and align with change
management
Reporting
Ensure SLAs are met
Tester Open and log defects
Assign severity
Provide fault description and error information for developers
Developer /
Analyst
Acknowledge defects and
severities
Coordinate defect fixing
Ensure SLAs are met
Figure 45: Test Roles and Responsibilities
130
Definition of test reporting
Figure 46: Examples of test reporting
0
5
10
15
20
25
30
35
1 2 3 4 5 6 7 8 9 10 11 12
TC Exec OK TC Exec Failed TC Exec Planned
TC Planned TC Added
8
2125
3033
2521 20
17
2
7
1520 22
16 15 1512
-50
-40
-30
-20
-10
0
10
20
30
40
50
CW 1 CW 2 CW 3 CW 4 CW 5 CW 6 CW 7 CW 8 CW 9 CW 10 CW 11 CW 12
Total Number of Open Defects Total Defects Closed
Planned Fixing Rate
131
5.7.5.4 Step 5.4.: Training and Documentation
The training and documentation step is dedicated to present a best practice
approach for train the organization with respect to the results from the project for an
optimal usage of the build systems and to document the results.
The responsibility for this step is within the POrg, especially the project manager. The
tool for this step is the generic training and documentation concept which defines the
following topics.
Definition of TARGET GROUPS and USERS
o Identification of users
o User – Role matching
o Introducing new users
Prepare the TRAINING CONTENT
Setup technical TRAINING ENVIRONMENT
Define TRAINING TYPES
o Management Information Events
o Training of Standard User
o Training of Expert Users
o Train the trainer
Prepare DOCUMENTATION
o Handouts
o Quick Reference Guide
o Multiple-Choice-Questionnaire
o Storage
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5.7.5.6 Step 5.5.: Rollout and transfer into operational business
The last step of the ISOL-M is the rollout and transfer into operational business
step. The rollout step is dedicated to a controlled go live of the system for the
operational business. Main focus is to deliver the results of the project to the business.
The transfer into line step ensures that operational units use the results from the project
as planned and for that generate the planned contribution to the strategic goal. An
optimal performance in the step “test” and “training” is the needed pre-condition for
this step.
The last process of this step is the closure of the project in the SMB Council
which leads to a discharge of the resources and a final closure of the costs lines in the
STRATEX.
Rollout
The rollout step has six major process steps as shown in the below figure.
Figure 47: rollout process
Preperation Sanity Check Freeze Go Live Stabilization
133
Preparation Step – The preparation step considers that the complete
environment (organizational and technical) is prepared for the rollout. Sub-Steps like
the definition of the freeze timeslot, setting the organizational responsibilities,
definition of checklists and step-by-step processes, definition of possible roll-back-
scenarios are typical.
Sanity Check – The sanity check is walk through a list of all needed activities
that need to be done with the go live.
Freeze – The freeze step is needed to get an optimal environment with as little
as possible interactions and changes for the go-live.
Go-Live – The go-live is the step where the results of the project gets “switch
online” into the actual business environment.
Stabilization – This phase is after the go live where for safety reasons a part of
the project team is still on board to manage and control the first days of the new
business.
Transfer into line
The transfer into line step is organized by the POrg together with the line
managers. Basis for the actions in this step is the tool generic operational manual which
is part of the project tool. The generic operational manual manages the following topics:
Definition of the to-be business process, organization and tools
Definition of the support processes and organization
Definition of the system and functionality
Monitoring and SLA Regulations
Meetings and Lessons Learned Sessions
134
Escalation, Troubleshooting and Emergency Concepts
With respect to the ISOL-M model the lessons learned sessions and the
monitoring are the topics to concentrate. Within the lessons learned sessions facts from
running the business must be communicated to the SMBOrg for analysis and learning
decisions regarding the next planned strategic actions. The monitoring tool must at least
deliver the numbers that count for the project value to control and monitor the real
values versus the planned values.
135
6 CONCLUSION
Kaplan´s theories, especially the execution premium provides an in the literature
outstanding approach to link strategy and operations. This area is in the science
literature barely developed and in the real business world a day-to-day problem area for
international companies.
With getting a deeper look and understanding of Kaplan´s model and
challenging them with a real-life experiment some major GAP´s could be discovered.
The main topic, which is not provided by Kaplan, are the direct links between the
processes, organizational responsibilities and tools for the complete cycle within the
“strategy to operations”-framework.
Figure 48: ISOL-M
136
The development of the ISOL-M with its 4 major phases as shown in the above
figure and the detailed description of processes, organizational responsibility and tool
support can contribute to close the GAP´s essentially. The combination of existing
methods were chosen under the conditions of
Value for strategy and operations
Usability
Potential for integrating in an overall model with respect of optimal interface
opportunities.
The focus of the ISOL-M was not to invent some new specific method or tool
within a specific area of strategy or operations management. The focus was on
inventing an overall model with seamless interconnections and interfaces between
given methods of strategy and operations management and providing the central theme
of an integrated execution phase.
The experiment at the energy company had shown that there is the need of
further developments of Kaplan´s theories to close the GAPs and provide a practicable
solution which helps companies to improve their strategy processes and transfer the
organization into a strategy focused organization for getting on top of competitors.
After the experiment and the development of the ISOL-M this new approach was tested
within a follow-up consulting project at the energy company. The results of this follow-
up project were tremendous.
Performing the ISOL-M helps the company to define suitable strategy
approaches in an extremely changing market with following results:
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Product development: Optimization of time to market and customer satisfaction
Before implementing the ISOL-M the time to market for new products was
around 20 to 24 month. Around 30% of developed products never made it into the
market because customer´s requirements changed within the development phase. One
reason for that was that product development was not connected to strategic decisions.
Every sales department developed their own products. Because of this, the supporting
units like IT-Department were confronted with about 40 to 60 product ideas a year.
Developing these product ideas without any strategy, without a suitable organization
form like project oriented matrix organization structures and without defined and
standardized project processes seem obviously impossible.
After the implementation of the ISOL-M with its structured processes, new set-
up organizational form and the interconnection of every action with the strategy the
time to market for a product decreased to 6 month in average. The product ideas have
been sorted out by the project decision processes and the approved projects decrease to
around 15 per year, and about 6-8 in the area of product development. Since the
implementation of the ISOL-M every product was purchased by the customer.
Change of leadership with matrix organization structure
As already mentioned in the GAP analysis the company was at the beginning
not ready for the changes coming up with the implementation of the ISOL-M cause of
two reasons. First: the organizational setting of the company was strictly functional
oriented. All business departments were strictly functional and the management from
top to middle management level acts within this functional restrictions. Second: the
company has barely developed knowledge, competency and experience in project
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management, cause the focus within the functional organization was operational and
department oriented.
With the implementation of the ISOL-M the organizational structure of the
company has changed and transferred to a matrix-oriented and therefore project
oriented organizational structure. After investing in programs of educating project
management competencies and transferring the organization to a matrix structure the
result was a much more flexible organization, which now can handle very quickly and
effectively the day-by-day challenges in a competition driven market. So the
implementation of the ISOL-M with its organizational requirements made the company
better prepared for the future.
Another improvement was the way how leadership changes with the
implementation of the ISOL-M. Before the project the top level management had to
deal with a limited circle of next-level managers, concrete the 4 to 5 line or department
managers of the functional oriented organization. After the implementation they had to
deal additional with the matrix responsible managers, especially the initiative and
program managers. This changes the way of leadership and daily management behavior
from the ground. There was the need for a special change management program for the
top level management to rise their skills to perform within this new organizational
structure. After breaking the mindset barriers in this area the top level management was
fully able to act effectively and totally strategy-oriented on a professional level. For that
reason the implementation of the ISOL-M brought another improvement to the
company: the rise of a modern and flexible art of leadership needed for getting on the
top of competition in a restricted market environment.
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Align organization by linking strategy goals to incentive programs
Another improvement of the implementation of the ISOL-M was the successful
alignment of the organization to strategy goals. Within the functional organization
structure the goals for every employee were defined by department goals broke down
to personal goals for the employee. The adding of strategic goals to the personal goals
and link them with the incentive program of the company provided a quick and effective
way of aligning the organization with the strategic goals. With this change the mindset
of the employees changes immediately. They cared about the realization of the strategy
the same way the cared before about the realization of the department goals. Therefore
a totally new mindset directly connected to the strategy came up.
Proactive management with new management system tools
Before the project the company acts very reactively on external and internal
changes and therefore they often were in the position of being late to the trends and
needed changes for a successful business. With the implementation of the ISOL-M and
its performance tools, especially the SMBTool they get into a position of being able to
proactively act on the market. With this management system tool they were able to
outperform their competitors by speed and quality which results in better revenue
numbers and lower costs.
The implementation of the ISOL-M was the basis for the company to outperform
their competitors in the last two years with innovative products, customer satisfaction,
employees which are highly motivated and act directly to strategic goals, a top level
management which is able to steer the company in the framework of set vision, mission
and strategy into a successful future and last but not least excellence revenues and
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growth. The company rises with respect to revenue and market share from number 7 to
number 4 of all energy companies in Germany.
The ISOL-M has after this first project with the energy company been performed
several times in the automotive and telecommunication industry. The actual experience
implementing and performing the ISOL-M proofs that this generic model for industrial
oriented companies brings enormous added value.
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APPENDIX
Abbreviations
ABC Activity-based Costing
BSC Balanced Score Card
CAPEX Capital Expenses
CEO Chief Executive Officer
CSF Critical Success Factors
CMO Chief of Marketing and Sales
HR Human Resources
ERP Enterprise Resource Planning
EU European Union
GPM German Institute for Project Management
IPOrg Initiative and Program Organization
ISOL-M Integrated-Strategy-to-Operations-Linking-Model
ITPM IT Process Quality Management
MRP Material Resource Planning
OAS Objective Advantage Scope
OPEX Operating Expenses
OSM Office of Strategy Management
P&L Profit-and-Loss Statement
PDCA Plan–Do–Check–Act
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PESTEL Political, economical, social, technological, environmental, legal
POrg Project Organization
PTO Processes, Tools, Organization
R&D Research and Development
RASI Responsible, accountable, consult, inform
ROI Return On Invest
SMB Strategy Management Board
SMBOrg Strategy Management Board Organization
SMO Strategy Management Office
SMOrg Strategic Management Organization
STRATEX Strategic expenses
SWOT Strengths, Weaknesses, Opportunities, Threats
TDABC Time-Driven Activity-Based Costing
TQM Total Quality Management
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CURRICULUM VITA
NAME: Alexander Bogner
ADDRESS: Adalbertstrasse 108
80469 Munich
Germany
DOB: Munich, 2nd of November 1975
EDUCATION
& TRAINING:
Diplom Kaufmann,
University of applied science Hamburg
2001 – 2005
Master of Science Industrial Engineering
University of Louisville
2009 - 2010
PROFESSIONAL
SOCIETIES:
Senior Partner
Infologis AG
Strategy execution consulting